Goldman Sachs and Morgan Stanley are recapturing trading business from their hedge fund customers. The two US banks had lost trading business to European rivals and now are winning back the business from hedge fund clients as European banks have started scaling down their operations owing to new capital rules adhering to Basel-III norms. European banks majors such as Deutsche Bank are trimming down business operations.

Morgan Stanley and Goldman Sachs together have a market share in trading for hedge funds at 37 percent after the six percent growth this year. The encouraging growth in trading for hedge funds at the US banks is poised to increase further as other foreign banks stepping back. 

The new Basel-III rules are changing the dynamics of the global banking sector. European banks fall short of benchmarks set for capital requirements, which aim at keeping banks in a safer zone. The trading for hedge funds and financing positions is called as 'Prime Brokerage.' This is one prominent segment, in which Wall Street is witnessing robust growth in revenues and rise in prices while the competition is declining according to a study done by research firm Preqin.

The encouraging growth in Prime Brokerage is boosting profits in stock trading for JPMorgan & Chase, Goldman Sachs and Morgan Stanley. This segment is likely to be the star performer in their portfolio when they announce quarterly results later this month. Many market analysts forecast that Prime Brokerage would help the US banking majors to post encouraging results. 

The new Basel-III rules keep tabs on debt that banks take to fund their assets. Banks need to specify the minimum amount of equity or capital that banks use. Prime Brokerage requires higher capital. The trading in stocks, bonds and other derivatives needs huge capital for banks.

Preqin data reveals that Deutsche Bank's market share fell a percentage point to seven percent since 2013. Deutsche Bank suffered losses in 2014. Similarly, Credit Suisse is also planning to cut down its prime brokerage business. Credit Suisse and Deutsche Bank are being reviewed in global strategy.

The faster the compliance with new Basel-III rules, the higher the gains for the banks. Generally, Prime brokerage is thin margin business game, but it's very important in boosting stock trading revenues. The high volume trading generates more Prime brokerage, which accounted for 35 percent of total equity revenues in 2014, according to Coalition estimate. 

The Prime brokerage contributed 25 percent to the total equity revenues in 2009 and 31 percent in 2013. Taking advantage of Basel-III rules, the US banks have also started marketing aggressively to gain more hedge fund trading business, while European banks are falling short of high capital requirements.

Morgan Stanley registered 28 percent growth in stock trading revenues in the second quarter mostly with the contribution from Prime brokerage. Goldman Sachs' trading revenues grew 63 percent during the second quarter mainly strengthened by Prime brokerage profits. The combines Prime brokerage profits at 10 major global investment banks rose 11 percent to $14.2billion in 2014.