In order to get big, sometimes a desk has to start small.
That’s the approach Deutsche Bank is taking, reaching for a greater share of trading volume by concentrating its efforts on the small-cap stocks business. To that end, the bulge bracket firm has opened a desk that will specialize in these lesser-covered but higher yielding stocks.
Deutsche Bank’s global head of equity trading, Andre Crawford-Brunt, defines small-cap stocks as issues with a market capitalization of $2 billion or less. Crawford-Brunt said the firm’s interest in this sector stems from a lengthy review of where best to serve clients in a time of declining trading volume.
“This is an investment for us,” Crawford-Brunt told Traders Magazine this week. “Everyone is trying to get market share and the sellside is under pressure. We felt the small-cap space presented a compelling opportunity for us.”
The focus seems to be helping. In Greenwich Associates’ 2012 survey, Deutsche Bank was ranked as capturing the seventh spot in U.S. equities trading share. In the 2011 survey, Deutsche was twelfth. “We view U.S. equities as a key growth area and our goal is to be [in the] top five in the U.S,” Crawford-Brunt told Traders Magazine last June. “The jump to the top five is paramount to our ambitions.”
While other firms back off, Deutsche sees the small-cap space as a place where the broker can best assist buyside firms in their search for above-average returns.
“We think this plays to our strengths and we decided to seize the opportunity,” Crawford-Brunt said.
Small cap stocks are thinly traded. But, over long periods of time, their returns exceed those of large cap stocks, according to Deutsche Bank research, Ibbotson Associates data and Morningstar statistics.
Enter the new small-cap desk. Steve Smithers, a near seven year veteran with the firm and former Morgan Stanley alum is head of the firm’s small-cap product and oversees the new group. There are several other dedicated small-cap traders on the desk. The firm declined to name them or the exact size of the desk.
Joe Spinelli, head of North America cash equity trading, oversees this new small-cap group and Smithers. Spinelli joined the bank last August. Spinelli joins from Goldman Sachs, where he was a managing director and financial services sector head for equity trading. He was previously the head equity trader at Ziff Brothers Investments.
Spinelli Told Traders Magazine that the new small-cap team will be a stand-alone business within the firm’s high touch offering.
“As the industry struggles with market volumes, clients and not just mutual funds, are ironically, spending more time on small- and mid-cap stocks,” Spinelli said. “Alpha has proven to be elusive in the large cap arena, causing clients to spend more time moving down the market cap spectrum.”
The firm plans to leverage its investment banking and research to assist the trading desk. The firm provides research coverage on 259 small-cap stocks, or roughly 31 percent of its corporate research offering. According to Crawford-Brunt, there are 1,850 firms that qualify as small-cap or having a worth of less than $2 billion.
“We are not only adding dedicated trading but also adding resources across company research, U.S. equity strategy, global asset allocation and corporate access,” Spinelli said.
Given the recent inception of the desk, traders will follow the traditional high-touch trading mode – telephony and elbow grease. Spinelli added small-cap algos can add value to the execution process, but they often fall short in creating the liquidity that clients seek in this less liquid segment of the market. Therefore, the need for more of a traditional high-touch approach that incorporates block trading expertise is essential.
