How Goldman And Morgan Stanley Dominate Equities Trading
The impact of tighter regulations and changing market conditions on trading revenues at banks has been evident over the last few quarters. While trading operations generate considerably lower revenues now than they did before the economic downturn of 2008, the difference is more prominent in the fixed-income business. In fact, almost all global investment banking giants have scaled down their fixed-income trading desks in recent years, with some such as UBS (NYSE:UBS) and Morgan Stanley (NYSE:MS) shrinking them to bare-minimum levels. As a result, the equities trading business – which has largely played second fiddle to the more profitable fixed-income trading business in the past – has been in the limelight in the last couple of years.
Some investment banks now rely more heavily on equities trading as an integral part of their business model than others, and more importantly, some of them are evidently better at churning out profits from these operations. In this article, we detail the revenues generated by the equities trading operations at the country’s five largest investment banks. We also discuss how these revenues at the banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America-Merrill Lynch (NYSE:BAC) and Citigroup (NYSE:C) – impact their top line figures.
- Trailing S&P500 By 18% Since The Start Of 2023, What To Expect From Goldman Sachs Stock?
- Down 12% In The Last Twelve Months, Where Is Goldman Sachs Stock Headed?
- What To Expect From Goldman Sachs Stock?
- Goldman Sachs Stock Is Undervalued At The Current Levels
- Goldman Sachs To Edge Past the Consensus In Q1
- Goldman Sachs Stock Is Trading Below Its Intrinsic Value
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 nine 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.
| (in $ mil) | Q1 2012 | Q2 2012 | Q3 2012 | Q4 2012 | Q1 2013 | Q2 2013 | Q3 2013 | Q4 2013 | Q1 2014 |
| Goldman Sachs | 2,358 | 1,696 | 2,105 | 2,351 | 1,957 | 1,823 | 1,641 | 1,725 | 1,596 |
| Morgan Stanley | 1,833 | 1,144 | 1,228 | 1,271 | 1,594 | 1,806 | 1,821 | 1,705 | 1,679 |
| JPMorgan | 1,424 | 1,043 | 1,044 | 895 | 1,340 | 1,296 | 1,249 | 873 | 1,295 |
| Bank of America | 1,059 | 780 | 715 | 713 | 1,149 | 1,194 | 970 | 904 | 1,153 |
| Citigroup | 916 | 561 | 522 | 465 | 826 | 942 | 710 | 539 | 883 |
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. In fact, Goldman has ranked first in terms of equities trading revenues for 11 of the last 13 quarters – except Q3 2013 and Q1 2014, when Morgan Stanley fared better. Both the investment banks 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 made more than $1 billion in equities trading revenues just once in the last three years (Q1 2011).
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.
| (in $ mil) | Total Revenues | Equities Revenues | Equities / Total | Std. Dev. | Std. Dev./ Mean |
| Goldman Sachs | 8,193 | 1,947 | 23.76% | 273 | 14.0% |
| Morgan Stanley | 7,672 | 1,556 | 20.28% | 251 | 16.1% |
| JPMorgan | 24,143 | 1,149 | 4.76% | 208 | 18.1% |
| Bank of America | 22,177 | 953 | 4.30% | 206 | 21.6% |
| Citigroup | 18,808 | 674 | 3.58% | 252 | 37.4% |
| TOTAL | 80,993 | 6,280 | 7.75% | 916 | 14.6% |
This table includes the average quarterly revenues each bank reported over the same thirteen-quarter period 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.
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.
See More at Trefis | View Interactive Institutional Research (Powered by Trefis) | Get Trefis Technology