Cowen has dramatically changed its presence in Europe and is aggressively investing in all of its businesses while the likes of Deutsche Bank, Credit Suisse, and others continue to downsize their operations. In the Prime Brokerage and Outsourced Trading businesses, the firm is planning meaningful expansions for 2020 and beyond. In the former, this effort is aimed at filling the void being created by others, while in the latter the commitment is in response to a sharp increase in demand for such services.
Speaking to Hedgeweek, Jack Seibald, Managing Director, Global Co-Head of Prime Brokerage and Outsourced Trading at Cowen, confirms that in the wake of the Deutsche Bank announcement and the cutbacks at other large banks, “there are talented prime brokerage, trading and capital introduction people now available in the market.
“Though they may not have considered Cowen before, we now have the chance to attract them as we expand our platform. We’ve been actively interviewing in London recently. At the same time, many hedge funds are also finding themselves looking for alternate solutions.
“All I can say at this stage is that there is no diminishment whatsoever in Cowen’s growth aspirations; not just for its Prime Services business, but all of its businesses.”
Separate from the prime business, Cowen recently hired a number of senior executives from Deutsche Bank’s EMEA institutional sales trading team, including former EMEA head, Matt Cyzer, who has been appointed CEO of Cowen Execution Services in London.
“Just as we have developed cross-referrals here in the US from the institutional sales trading business to the PB and OT businesses, we now have a similar capability in Europe with a highly regarded team touching a lot of institutional and hedge fund managers,” explains Seibald.
He thinks that this could, potentially, make a huge difference for Cowen’s Prime Brokerage and Outsourced Trading businesses over the next few years, and will undoubtedly bolster Cowen’s brand among the institutional fund community in the UK and EU.
“Our pitch for business with hedge fund managers here in the US isn’t just about our Prime Services solution, but rather has included a broad Cowen pitch that extends to the firm’s research, corporate access events, capital markets activities, securities financing, global electronic execution, and cross asset capabilities. With the credibility of the firm’s newly established institutional presence in Europe, we expect that our London based business development team will similarly be able to deliver a broad Cowen firm pitch to a larger audience,” adds Seibald.
As an introducing broker in the US, Cowen has multiple clearing and custody agreements in place with Goldman Sachs, Pershing (Bank of New York), and Merrill Lynch, alongside the firm’s self-clearing solution.
The strength of Cowen’s multi-clearing IB Model is that for smaller and emerging hedge funds, it offers an alternative way of getting a relationship in place with one of the bulge bracket names without having to deal with them directly as a standalone client.
Reflecting on 2019, Seibald says that revenues have been steady, but haven’t shot the lights out, partly attributable, in his view, to overall market trading volumes remaining modest to fair at best.
“Structurally, there are now some 3,500 stocks trading compared to more than double that number a decade ago, and much more of the daily trading activity is being driven by passive strategies. Adding to the volume headwinds is that today there are so many more stocks that trade at hundreds of dollars, unlike a decade ago,” says Seibald.
Indeed, one only has to refer to the tech giants like Amazon, whose stock price is USD1,787, to appreciate this is causing transaction costs at US prime brokers to compress.
“In the US, we don’t price transaction costs on the notional value of the transactions, but rather base it on the number of shares executed, even though portfolios are managed notionally. This change in market structure, in terms of how many stocks trade at such high prices, reduces the number of shares being traded, which for PBs means a reduction in transaction revenues. The US and Canada are the only markets where transaction costs are not priced on the notional value. Intuitively, this doesn’t make sense and ought to be reconsidered,” opines Seibald.
Nevertheless, thanks to a series of high-value ancillary services, including Outsourced Trading, Cowen keeps moving up the food chain, in terms of hedge fund manager AUM and manager pedigree.
“Outsourced Trading has been a key driver of revenues for us this year. It’s grown at an even greater pace than 2018,” confirms Seibald. He says that two things have happened:
“One is that we are identifying opportunities to work with managers much earlier in the process. As soon as someone spins out of an existing hedge fund, we know about it and we engage with them right away. In many instances, we don’t turn the PB dial at that stage because most new launches with any pedigree and amount of capital will aim to PB with a bulge bracket prime. We go the other way and turn the conversation by asking questions like, ‘What are you going to do for trading and for operational support?’
“Second, because of the way we offer Outsourced Trading, which comes with a lot of ancillary support services, we think it’s increasing our shot at winning a piece of a manager’s PB business further down the line.
“Those services include complete operational support, full portfolio reconciliation and reporting, fully paid for securities lending, and capital introduction; a range of value-add services that can help to hook us into a manager’s business. Chances are when they decide to use a second PB, we will at least be in the mix, and based on who our clearing relationships are with, hopefully win a piece of that business.”
It’s all about planting the seed, according to Seibald: not to offer Prime Services necessarily on day one, but two or three years down the line when a manager’s AUM has grown to a sufficient size and they have established a trusted relationship with Cowen’s outsourced trading team.
As Cowen’s PB business gears up for another year of expansion in 2020 – not only in London, but also in its relatively new Hong Kong office – one of the key traits that stand it in good stead is discipline. This is not a firm that suffers from delusions of grandeur.
“We know we’re not a bulge bracket firm, and we have no desire to become one,” asserts Seibald.
“We will focus our efforts and our resource allocation on the things we do well to add value to our clients. We don’t have the balance sheet to compete with the bulge bracket PB businesses, but if we can work as an effective partner, and if a hedge fund wishes to move USD100 million onto someone else’s balance sheet for counterparty diversification, then we would like to think we could be a viable option.”
With its sights set on Europe and Asia, 2020 could be a game changer for Cowen.
Jack Seibald
Managing Director, Global Co-Head of Prime Brokerage and Outsourced Trading, Cowen Prime Services
Jack Seibald is Global Co-Head of Prime Brokerage and Outsourced Trading, Cowen Inc. He was a co-founder and managing member of Concept Capital Markets, LLC until its acquisition by Cowen Group, Inc. in September 2015. He has been affiliated with the firm and its predecessors since 1995, and has extensive experience in prime brokerage, outsourced trading, investment management, and research dating back to 1983.
