Q2 2014 U.S. Investment Bank Round-Up: Equity Trading

Global investment banks witnessed a marked reduction in equity trading activity over the second quarter of the year compared to the considerably strong year-ago period when reports of the Fed’s tapering plans made equity investments more attractive compared to debt securities. Given that the first quarter of the year also gains from a season boost in global trading activity, Q2 2014 trading revenues were anyway expected to show a sequential decline. To make things worse, global markets also reacted negatively on several occasions over the period due to the political turmoil in Ukraine and Iraq. All these factors taken together indicated a lukewarm second quarter for the banks’ equity trading desks.

Equity trading revenues reported by the country’s five largest investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – last month show that Q2 2014 was indeed a rather slow period in this regard. In this article, which is a part of our ongoing series on these investment banking giants, we highlight the trends seen in equity trading revenues for the banks and how important these revenues are to the business model of each of these banks.

See the full Trefis analysis for Goldman Sachs | JPMorgan | Morgan Stanley | Bank of America| Citigroup

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 ten quarters. 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. As the DVA is inherently an accounting-related charge it doesn’t really influence operating revenues for any period.

The clear domination of Goldman Sachs and Morgan Stanley in the equities trading business is evident from the table above – monopolizing the first two ranks on the list in each quarter. While Goldman has ranked first in terms of equities trading revenues in each quarter between Q1 2012 and Q2 2013, Morgan Stanley edged ahead in Q3 2013, Q1 2014 and Q2 2014. In fact, Morgan Stanley was the only bank in the list to report a quarter-on-quarter improvement in equity trading revenues in the second quarter – bettering its already strong Q1 2014 performance.

Both Morgan Stanley and Goldman rely heavily on market making, hedging and algorithmic trading operations to boost their top line figures. In comparison, Citigroup has a considerably smaller equities trading desk – choosing to focus on fixed-income trading instead. Citigroup has not made more than $1 billion in equities trading revenues in any quarter since Q1 2011. Taken together, these five banks made $6.2 billion in equities trading revenues in Q2 2014 – a 6% decline compared to the $6.6 billion figure for Q1 2014 and a steeper 12% fall from the $7 billion earning in Q2 2013.

While the figures above allow for a simple comparison of quarterly revenues across the investment banking giants, this data doesn’t really lend itself to an understanding of the relative importance of equities trading desks in a particular bank’s business model. To facilitate a better comparison, we compiled the following table which consolidates the figures above into a single set of average quarterly numbers.

This table includes the average quarterly revenues each bank reported over the fourteen-quarter period from Q1 2011 and Q2 2014 and has been sorted based on the average equities revenues earned in a quarter. Goldman Sachs stands out in this regard – generating just under $2 billion from its equities trading desk. This is almost 25% of the bank’s total quarterly revenues – a little less than the near-30% it generates from fixed-income trading on average. Notably, Morgan Stanley’s equities trading desk – which makes $1.5 billion on average each quarter – contributes more than 20% of its total revenues. In comparison, its fixed-income business is responsible for 15% of total revenues – making Morgan Stanley the only bank among the five to make more money from equities trading than fixed-income trading. The other three banks generate less than 5% of their total revenues through equities trading – a result of their more diversified business models that focus considerably on loans-and-deposits services.

A relevant point here is that despite raking in the most cash from their equities unit compared to their more diversified competitors, both Goldman and Morgan Stanley have the lowest coefficient of variation (ratio of standard deviation and mean) among these five banks. This would suggest that their trading risks are largely balanced, most likely thanks to the sheer volume of trades they enter into over a period.

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