Archegos Saga Not So Tragic For Wall Street’s Big Brokers

SourceThe Wall Street Journal
SectorFinancial Markets
CountryMiddle east

The saga of Archegos Capital Management has put the spotlight on a little-known but vital business for Wall Street: Prime brokerage. The resulting scrutiny could impact this engine of trading, but it might also wind up playing into the hands of the biggest banks. The biggest source of banks’ equities-trading revenue was once cash trading, or the relatively straightforward business of helping clients execute trades. But while commissions narrowed over the last decade or so, prime brokerage revenue grew. Prime brokers provide financing for trading clients like hedge funds, leading to both lending income and trading activity.

Banks can also use their prime units to pool trading and risk exposures to help drive profitability across their trading desks. Morgan Stanley in 2019 referred to prime as “sort of the center of the machine” for equities. Last year, prime services generated $15.2 billion in revenue for the largest global investment banks, according to industry data provider Coalition Greenwich. That figure was down from 2019 as hedge funds dialed-down their borrowing amid the coronavirus pandemic, more...