(Bloomberg Opinion) — Europe’s big banks have joined the global stock trading party. Danger lurks, however: When the market turns, it is often brutal.
Barclays Plc and UBS Group AG this week reported increased equity trading revenue of 46% and 53% in dollar terms, respectively, versus last year’s second quarter. BNP Paribas SA showed a 47% rise last week. Citigroup Inc., which is also playing catchup, reported similar growth. As strong as these numbers are, they pale next to the 70%-plus gains at the other four big US banks. The key difference for the US leaders in the second quarter was their already huge businesses lending to hedge funds and other leveraged traders.
All are enjoying a boost from the same sources: Strong equity derivatives activity, increased prime brokerage lending, and a tilt toward Asia where tech-related stocks have been highly volatile, attracting major global hedge funds and thrill-seeking local investors. Banks have focused increasingly on higher-margin derivatives and financing in recent years, as the super-fast, tech-savvy market makers like Citadel Securities LLC and Jane Street LLC have come to dominate lower-cost trading.
UBS unusually insisted that matching buyers and sellers drove performance in its stock-trading arm in the quarter, and said it had kept a rein on how much it allowed hedge fund borrowing to grow despite exuberant demand. The Swiss bank is limiting the balance-sheet share available to its investment bank, and is wary of being too exposed to a downturn in equity markets. That might mean giving up some higher returns in the short run and even losing clients to rivals over time. But UBS is focused more on growing wealth management — and on not frightening its shareholders with nasty surprises from its investment bank.
Barclays has also capped the size of its investment bank and wants it to account for only half of the group’s risk-weighted assets, a measure of the size of its balance sheet, by 2028, down from about 55% currently. However, it can still pursue a bigger share of lending to hedge funds and other debt-fueled investors such as proprietary trading firms, or managers that run leveraged exchange traded funds, like those that have been popular in Korea.
This is the great attraction of prime broking: Lending against stocks attracts low risk weights and uses less capital, because the shares used as collateral are assumed to be very liquid and easily sold if a borrower gets into trouble. That makes it a business that produces high returns on capital.
Stock trading in general has produced a larger share of investment banking revenue over the past five years compared with the decade before, mostly because of the growth of ETFs and hedge fund lending. At its May investor day, Citigroup made a clear case for chasing this growth by contrasting the low returns of its own stock-trading unit with those of its US rivals. Citigroup’s equities desks made about a 7% return on capital in 2025, compared with more than 17% on average for its peers. The difference, according to head of markets Andrew Morton, was scale in prime brokerage: Between 2022 and 2025, Citigroup more than doubled the amount it lends to hedge funds to $450 billion, but wants to lift that to about $700 billion soon.
Barclays and BNP have been pushing the lending arms of their trading business, too, trying to win more revenue from the same group of large, globally active multi-strategy hedge funds that all the big banks want to work with. For the UK bank, this focus is boosting the income it makes per dollar of capital used in its investment bank. When Chief Executive Officer CS Venkatakrishnan launched a strategy overhaul in 2023, Barclays was the laggard among European investment banks in terms of this gauge of how efficiently it’s earning money. Its ratio of revenue to risk-weighted assets has now caught up with BNP, and has Deutsche Bank AG in its sights.
But there’s a question for Barclays about how sustainable the equities-led progress will be, particularly against European rivals. Deutsche Bank has no significant equities trading business since CEO Christian Sewing decided to get out in 2019, while BNP remains more focused on corporate rather than financial clients, despite its big push into prime broking.
It is also a risky time to be chasing market share when stock markets have been on a long rally centered around technology and a small group of massive, highly valued companies — and where the use of borrowed money and aggressive options bets by big firms and retail investors is also extensive.
The focus of lenders is quite concentrated, too — deliberately so, because the biggest funds have the greatest appetite for borrowing across the most markets and do more trading. Barclays noted that 80% of its revenue growth in markets came from its top 100 global clients.
The more crowded the trades, and the more common the borrowers, the riskier prime broking becomes. It consumes little capital because liquid stocks are meant to be easily sold when things go wrong. But that idea can break when everyone is trying to sell the same stocks at the same time. Some banks are already asking hedge fund clients to put up more collateral against their borrowings, while the Bank of England is asking London-based desks about their exposure to Asian AI-related stocks in the current selloff, according to the Financial Times.
Everyone needs to tread carefully in these exuberant markets, but especially those banks fighting hardest to join the hedge fund party.
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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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