Citadel shows some moats are still hard to cross

Reuters


(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Antony Currie
NEW YORK, Aug 12 (Reuters Breakingviews) - Citadel's abandoning of its investment banking dreams shows how some financial moats(A ditch similar to one surrounding a fortification: A moat separates the animals in the zoo from the spectators.) are still hard to cross. The Chicago hedge fund run by Ken Griffin is closing its equity research unit and hoping to sell its fledgling advisory business less than three years after taking on Wall Street's titans. Internal conflicts didn't help while adding a middle man to an investing business created conflicts, too. But the bulge-bracket firms also held up better than expected.
There were reasons for Griffin to be optimistic. Citadel already had built a formidable franchise offering clients electronic trading in equities and equity options, which it is keeping. And the likes of Citigroup, Merrill Lynch and Morgan Stanley looked so wounded by the crisis that nimble(Quick, clever, and acute in devising or understanding) new players were given an opening to snap up((Snatch for one's own use, as in As soon as they lower the price we intend to snap up the house; it's exactly what we want.)) market share.
Citadel was not alone. British inter-dealer broker ICAP set up an equities business and boutique advisory firm Evercore jumped into equity underwriting and research. But it has been a hard slog. There was almost no backlash from clients against the entrenched players. And while Evercore is persevering, ICAP jettisoned most of its ambitions.
Evercore has an advantage, though: underwriting is a clearer fit for an M&A shop. Bolting an investment bank onto a hedge fund is tougher. The cultures are different. And though many of the bankers Citadel hired to set up the division were big guns, they were not necessarily suited to building from scratch. Several left within months of joining.
It also raises the prospect of conflicts. That's not new for Wall Street. But with the industry's ethics under the spotlight, it may have been another impediment for a startup. In its short life, Citadel Securities worked on just three mergers and two public equity deals -- a capital raise for E*Trade, which it owns a slug of, and another for Windy City neighbor CBOE, where Citadel places many of its options trades.
As commercial banks, foreign interlopers(One that interferes with the affairs of others, often for selfish reasons; a meddler.) and others have already discovered to their cost, for all the trouble on Wall Street, it also still has some solid defenses. Reversing course on his investment banking plans, while an embarrassing retreat, is hardly a big problem for Griffin. But he has not completely abandoned his assault on Wall Street. Citadel announced Friday it increased its stake in Evercore more than sixfold to 5.2 percent. Even steely investors know if you can't beat 'em, join 'em.

CONTEXT NEWS
-- Citadel Securities has closed the equity research unit it started last year and is considering closing or selling its investment-banking business. Hedge fund Citadel decided to expand into the advisory business in 2009 following the credit crisis. The equity and equity options trading divisions which have been running since the early part of the century and which form the core of Citadel Securities will remain unaffected.

((antony.currie@thomsonreuters.com))
(Editing by Jeffrey Goldfarb and Martin Langfield)