Societe Generale has big plans to grow its U.S. equities business, and the strategy focuses on building on its strengths–program trading and derivatives.
The mid-tier firm is the U.S. brokerage arm of the giant French bank of the same name. SocGen is banking that its expertise in risk and derivatives can be leveraged into client-facing businesses, such as algorithms and other electronic trading products. In addition, a full-blown fundamental research product is on the way.
The man leading the charge is Timothy Gee, who was hired in September to head the firm’s equities execution services group in the Americas–primarily the cash business–in a newly created position. Gee is responsible for growing the business. He says he plans to do that by expanding the client base and by offering clients better trading products.
Brokerage firms of all stripes are adding products and services to raise their profile–and, they hope, revenues–among institutional clients. And last year’s decreased commission spend has heightened competition on Wall Street. Consequently, firms are facing the choice of either delivering more to clients or becoming less important to them.
SocGen will build on its strengths, Gee said. Those include its U.S. risk business; its U.S. derivatives business; its large U.S. prop desk, from which to leverage electronic trading technology; and its international cash businesses in Europe and Asia, comprising single-stock, programs and derivatives.
"We recognize that we are viewed in the Americas as somewhat of a specialty firm with a focus on derivatives and European and Asian cash," Gee said. "But we know we are in a position to offer our clients more. We have a story to tell."
For starters, beefed-up cash and electronic businesses should broaden SocGen’s revenues and client base, Gee added. From there, it will be easier for the firm to walk into an institution to sell its more complex products, such as structured derivatives and tailored solutions.
In the U.S. bank hierarchy, Societe Generale fits just below the top tier, Gee said. And below the bulge bracket level–which is primarily driven by the coordinated model of banking, prime brokerage or research–finding a niche becomes paramount.
Gee’s background helped groom him for the task at hand; his career is steeped in programs and derivatives. Before SocGen, he ran cash trading distribution and was co-head of global electronic trading for UBS.
Prior to joining UBS in 2005 as head of program trading sales for the Americas, Gee held a similar role at Morgan Stanley. He was also responsible for portfolio strategies and quantitative analysis during his 12 years there.
And over the years, derivatives have always played an important part. In fact, Gee was a derivatives salesman for a majority of his career; he traded derivatives before coming onto the cash side. Part of his job today is to figure out what SocGen does well in derivatives and make it relevant to a broader cash universe.
"It means you have to be really good at a lot of things to be good at derivatives," Gee said. "One is creativity. Another could be risk management, knowing when to commit capital, knowing how to handle that capital."
At SocGen, his responsibilities encompass single-order, program trading, electronic trading and delta one businesses. Of those, Gee highlighted the firm’s risk business in programs as a solid foundation from which to expand and draw new clients. The firm is targeting a lot of quant-oriented funds and some traditional long-onlys interested in transitions, he said.
"We have a tremendously active risk program business in the U.S.," Gee said. "I would put us in the top five, in terms of notional taken down for blind risk. And this highlights one of the inherent strengths SocGen has: a key understanding of risk management."
In a risk bid, or principal trade, a broker commits capital to take on a client’s basket of stocks, as well as its accompanying risk, for an agreed price and finds the liquidity for trading its components. In a blind bid, numerous brokers bid to take on a basket where neither the number nor names of the stocks are revealed. In an agency trade–which represents about 84 percent of all programs–a broker trades the basket for a commission, or the buyside trader handles the order himself.
Blind principal or risk bids comprised 6 percent of all program trades in the U.S. last year, according to the financial consultancy Greenwich Associates. And program trades represented 7 percent of all U.S. volume in 2010.
Will expanding business lines on the back of SocGen’s expertise in understanding and managing risk work? It will if the risk business is part of a larger set of product offerings, said a director of program trading at a large bank and a veteran in the portfolio trading business.
"You can’t just be a risk player," he said. "If you’re in the risk business, it’s very difficult to look at it as a stand-alone business. To consistently make money in it is very difficult."
At SocGen, the risk business doesn’t stand alone. The firm has also just started building its research in the U.S. by hiring some sector analysts. In November, SocGen brought aboard John Herrlin, an energy analyst who spent 14 years at Merrill Lynch. The firm wants to find talent in "under-covered niches," Gee said. SocGen has hired a sales force, as well. And it’s building out single-stock cash domestically to collect for this effort, Gee said.
SocGen will also rev up its electronic trading business during the first half of the year, to raise its profile with the U.S. client base. As a result, SocGen is hiring both high-touch and low-touch sales traders and traders.
The firm is looking at the infrastructure of its proprietary trading unit as the foundation for the growth of its client business on the electronic side. That infrastructure’s models and correlations, as well as the logic behind some of the prop unit’s insights, can all be leveraged, Gee said.
"There’s nothing saying that the heart of a stat arb model can’t be used to predict order placement for an algorithm, because it’s essentially addressing the same problem," Gee said.
The electronic buildup should include new or upgraded algorithms, routing and market access technology, as well as a crossing network. If done right, Gee added, the electronic agency business could generate more than 40 percent of SocGen’s customer-related equities revenues.
