Goldman Sachs Continues To Dominate Equities Trading

by Trefis Team
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Equities trading may have lost some of its shine over the recent years with tighter regulations looking to clamp down on the volatile business, but the same can hardly be said about the largest players in the market who continue to leverage their years of experience with equity markets across the globe, to churn out billions in trading revenues each quarter. Goldman Sachs (NYSE:GS) recovered from only its second ever quarterly loss in Q3 2011 due to stinging equity trading losses to generate $2 billion in revenues from its equities desk in four of the last five quarters – this was no mere feat.

While the other U.S. investment banking giants JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) have a sizable presence in the industry, Goldman maintains a huge lead over them. But the investment bank seems to be putting itself in a riskier position than its peers to remain one step ahead.

See the full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of AmericaCitigroup

The table below summarizes the revenues each of the five largest U.S. banks generated through their equity trading units for each of the last nine quarter. These figures have been adjusted for gains/losses linked to a revaluation of the banks’ own debt, as the DVA figures from one quarter to the next are often so drastic that revenues cannot be compared side-by-side without such an adjustment (see our article Banks’ Debt Valuation Accounting Rules Need A Revision for more detailed information about DVA and its effect on these banks).

(in $ mil) Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013
Goldman Sachs 2,336 1,349 (1,288) 1,278 2,217 205 1,915 1,934 1,971
Morgan Stanley 1,732 1,801 1,341 1,277 1,833 1,144 1,228 1,271 1,594
JPMorgan 1,478 1,145 1,047 806 1,424 1,043 1,044 895 1,340
Bank of America 1,299 1,046 753 652 1,059 780 715 713 1,149
Citigroup 1,089 790 290 233 916 561 522 465 826

As is evident from the table, Goldman Sachs is well ahead of its competitors when it comes to the performance of its equities desk. And one can also get a general understanding as to why from the trend seen in the revenues over the two year period shown above.

While being the highest among the five banks, Goldman’s revenues have also fluctuated the most over the period, from peak gains of $2.3 billion profit in Q1 2011 to a loss of $1.3 billion in Q3 2011. Also, none of the other investment banks booked a loss or even reported dismally low on equity trading revenues over the period. Goldman, hence, appears to be more open to taking more risks in its market making, hedging and algorithmic trading operations. This would help explain the overall volatility in revenues, something that can also be seen in the chart below, which represents Goldman’s equity trading yield over the years.

In contrast, equity trading revenues for Morgan Stanley, JPMorgan and Bank of America are characterized by regularity, with no drastic gains or losses. This would indicate that these banks are taking less risks in trading and are content with limiting their upside in order to avoid potential losses or higher volatility.

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