GREAT FT feature on the insides of/switching dynamics of banking system -- at least the financing of fin-market (fast) trading.

Here's "an inescapable reality on Wall Street":

"US banks are generating record trading profits. But they are not the ones doing the trading."

Firms such as Jane Street and Citadel have aggressively expanded into banks’ traditional turf, dominating the core business of market making as well as placing big bets on market moves. But their insatiable demand for financing to juice those trades has made them irresistible clients for lenders and a powerful engine for profits.

Still, banks have the credit moat:

The moat is built on credit lines that lenders provide to trading giants that run into trillions of dollars. Hedge funds’ borrowing from banks has tripled since 2020, and the revenues from financing have turned prime brokerage into one of Wall Street’s fastest-growing businesses

Pretty good business... if you can get it

as banks have leaned into the trading boom, they have inextricably bound their fates with their biggest clients — giant multi-manager hedge funds such as Citadel, Millennium Management and Point72, and proprietary trading firms including Jane Street and Hudson River Trading

Fun to see how the banking/financial-market trading industry has changed

Much of the speculative trading that once used to take place on banks’ prop desks migrated to the hedge fund industry, while market making — a lower-risk activity — became the purview of high-frequency trading firms and later specialist market makers

The key attraction of servicing hedge funds and trading firms is recurring revenues. Investment bankers can spend years courting executives such as Elon Musk in order to secure a one-off payment for advising on an initial public offering. But acting as prime broker to Citadel, Millennium or Jane Street offers a steady revenue stream that can generate as much as $200mn per year after trading costs, said three executives at bulge-bracket banks.

This graph I didn't quite understand...

...explanation goes:

Top-50 hedge funds borrow $3 to juice their bets for every dollar of money they manage, according to data from the US Federal Reserve. But for the top 15, that rises to $11 of borrowing, the data shows.

Those figures probably understate the true amount of leverage because they do not include derivatives exposure — which is built into the contracts themselves.

House of fucking cards.

Coolio:

Because the managers are sophisticated players with hundreds of trading teams across a spectrum of asset classes, they have an inbuilt diversification and level of risk management that has allowed banks to justify ratcheting up their lending.

SCALE effects via bank-in-the middle trade:

Scale helps banks too. The more trading flow they have, the easier it is to match one client’s long position with another client’s short — a crucial balancing act known as internalisation. That means the bank can finance both sides of the transaction without having to borrow or source stock in the open market, eliminating one of the costliest parts of the business and boosting margins

archive remains fucked: https://archive.md/kXgjp