Nomura sees end to proprietary-client model

The bank's Asia-Pacific joint head of equities, John Adair, argues the model of running proprietary and client equity business in parallel is unsustainable in this regulatory environment.
Nomura sees end to proprietary-client model

Japanese bank Nomura says the transfer of all agency execution business to its affiliate Instinet – instead of folding the unit into the investment bank – demonstrates its view that the traditional model of running client and proprietary business under one roof is unsustainable.

At a press conference yesterday, John Adair, its joint head of equities for Asia-Pacific, says the transition of the cash execution business to its wholly owned agency broker is also a response to the tougher regulatory environment that has made cost of capital for investment banks higher.

Clients of Nomura will still be given the option to bundle their cost of execution and research -- while Nomura will pass all the agency cash trading, programme trading and electronic trading to Instinet internally.

But the clearer operational delineation between the group’s proprietary and client business will enable it to weather the higher cost of business and depressed trading volume better than its rivals, Adair suggests.

“If you look at the [recent] financial results of some of our competitors, it shows their equity business [suffered from] large proprietary conflicts that come up within client business," he says. "Nomura will not face that now [by focusing on] delivery of our research product, risk product within our investor and corporate solutions unit.”

However, he declined to respond to questions on whether rivals who retain the traditional model will continue to see their equity businesses underperform when market activity and sentiment recovers.

Over the past three weeks the group says it has spoken with 700 clients globally about the transition, which it hopes to complete by end of this fiscal year.

The announcement on the shift ended years of speculation about the fate of the agency broker, which industry players had often said overlapped with part of Nomura's execution and sales trading business. Speculation revolved around folding part of Instinet’s business into Nomura; or Nomura ending its six-year ownership by divesting the unit.

Adair says over the next two months the group hopes to complete migrating clients to Instinet, which will also get some staff transferred from Nomura and report separately to Instinet management.

Nomura will now seek input from clients about how they want their services to be delivered once its equity business is split into three pillars comprising Instinet-led execution; Nomura-led research; and “investor and corporate solutions” that straddle its prime brokerage, convertibles, delta one, flow and structured derivatives.

Meanwhile, for cost saving and realising benefits that could be obtained from the transition, the “investor and corporate solutions team” will all centralise execution related to their hedging transactions through Instinet, Adair says.

Glenn Lesko, regional chief executive of Instinet, says the main reason certain buy-side clients still prefer to give their execution to agency brokers rather than investment bank trading desks is that clients see value from an agency broker being able to protect their flow.

“That is why we are not moving Instinet into Nomura, as this is a separate agency-only business that information is only transferred across to [Nomura] with the explicit consent of the clients,” notes Lesko.

He says with the transition, Instinet will get better access to clients in new Asian markets that it had not expanded into -- Malaysia, Thailand, Taiwan, Indonesia and India – outside of Hong Kong, Singapore and Australia that it currently operates in.

Lesko says over the last three years, Instinet has seen a daily average of $750 million in equities trading value, grossing up to annual liquidity of $166 billion across Asia-Pacific equities trading through its execution platform.

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