BCS Global Markets is a fast growing broker-dealer that has its origins in Russia, but has been diversifying into the UK and US. With offices in both countries it has been providing services in these markets for its Russian clients but at the same time using the platforms to establish itself in a number of niches. bne IntelliNews editor-in-chief Ben Aris sat down with BCS GM’s CEO Roman Lokhov on the sidelines of the recent annual MOEX investment summit in New York to discuss the bank’s business.
BA: BSC grew out of its Russian domestic business but has become increasingly international. You recently became a member of the New York Stock Exchange (NYSE), which is a first for a Russian bank. You now have offices in New York and in London with some 60% of revenues from non-Russian business. What is the idea behind the diversification and how have you managed it?
RL: The idea to diversify came several years ago after we gained 25% of MOEX trading turnover. You can have organic growth. You can add new debt. But ultimately you have to build a platform that can be used in other markets.
In London we saw an opportunity to get into the prime brokerage segment where we are strong. The regulation in Europe became very strict and we saw that funds in the middle range — $50m-$100m — are underbanked. Larger banks have these capital adequacy restrictions and other issues, and either overcharge these smaller funds or provide a low level of service. This is why we entered this niche.
We invested in a swap engine. We wanted to be innovative because no one in Russia does this sort of thing. We needed to keep our leading position at home so we have to innovate constantly. Some of these developments will come to Russia first eventually so why not be first?
BA: Are you using your platform to enter on the Russian business that you do, but then use the relationships with customers in the US and UK to build and offer non-Russian services by building on the relations that you already have?
RL: In Europe this was exactly the case. In America it was exactly the opposite. We started working on that market and as geopolitical [tension] picked up the Russian banks started to leave the market. There are just two government owned banks – VTB and Sberbank — who were left on the market.
I believe there is no Russian bank that was extremely successful in the US. Everyone who worked on the US market came with very standard services. They offered buying stocks or bonds and that was pretty much it.
Several years ago I felt it was not possible to come to New York and say that we are another Russian broker and offer services that people didn't need. So we tried to identify niches where we can compete, and to hire a good team of people so we can compete.
We created an American broker-dealer that provided niche services that addressed our customer base. We are very strong on execution, which is why we got membership in the NYSE. We can execute on blocks and participate in auctions and offer after market close trading, not just on Russian stocks but on everything. Then we invested in a desk trading distressed equities — Chapter 11 etc — not a lot of guys are doing it but it was another place were we can attract customers.
Last week closed a transaction where we provided a subordinated loan to a US minority broker to get access to IPOs and flows so we can provide unique services to Russian customers and those in other countries like Israel. This is important to our customers as normally the US is the second traded market after the local one.
BA: During this MOEX summit the sanctions have come up again and again. Is it not a problem to be Russian? People are nervous as dealing with Russians can have political ramifications. Do you suffer from that? Do you feel that? Or is it: the service is the service; the price is the price?
RL: It is not that easy. It all depends on the niche and the customers. Lets take several services. We are number one in servicing quants funds and high frequency trading. So the more volatility they get the better. Do they have problems there? No at all.
Long only funds? Do they have issues? Yes, of course. Sanctions are not a good thing and people are waiting to see what will come in two months or half a year. But number one they are here for the long-term. Yes, there will be uncertainty, and yes, there will be turbulence. But are we talking about six months time until things become clearer? Will these investors disappear forever? I don't think so. We have our relations. They still need good research on the CIS and Russia.
Tinkoff bank just returned 1,000% in the last two years. We still have very good midcap companies coming to market.
BA: There is a community in New York that has been investing in Russia and it has been an extremely turbulent ride. But they know full well that when you get the timing right then it can be a very profitable investment. Now the equities are very cheap because of the problems. Maybe this is a good time to get into the market?
RL: Everything is cheap, this is the broad picture. This is the picture for portfolio mangers, and maybe it is better to wait. But as an investment bank you have to be there, and there are still stories that are less dependent on sanctions. And it is always possible to cherrypick.
The sentiment on Russia is poor and stocks are down, but at the same time these two companies — shoe retailer Obuv Rossii and logistics company Transglobal — are dependent on the local market. We do roadshows with them every second month and they have fulfilled their investment programmed. I don't see investors that have sold their stock since the IPO last year. Investors believe in the story.
With our brand we have created a Russian investment story. We just had a conference in London and despite the fact the markets are closed at the moment and people are waiting, we had a significant number of people come willing to listen to stories.
BA: You think the market will come back and tensions will ease?
RL: Russia will come back for sure, but it is a question of time. Sanctions won’t disappear quickly but there are still a lot of opportunities.
BA: BCS GM recently tied up with Tigress Partners, which is a woman-owned fund in New York. What was the rationale for that?
RL: It is a minority US broker but it is in keeping with our idea of niche. They have access to certain deals and flows that we can’t get by ourselves. We see strong management and strong research. We need strong research on American stocks for Russia and we can execute on this with our membership on NYSE, which Tigress doesn't have. The deals they can access are difficult to find from Russia. So that is why we have our US office and the partnership.
BA: You are providing access and services to Russian investors that want to come to the States: but that business is still going on?
RL: Of course. Normally you need a platform to be competitive. There are interactive brokers getting into Russia and providing access to US, but we have a lot of advantages too. There are still billions of dollars coming into investment accounts and they are looking to diversify. And we want to be there to catch this flow.
This interview is part of a podcast. List to the whole interview here