Historically, equities trading has taken a backseat to fixed-income trading at major investment banks, largely because of the inherently lower volatility in the debt market compared to the equity market despite similar profit margins. However, that has changed somewhat since the economic downturn of 2008, as tougher regulation has forced some of the largest investment banks to shrink their fixed-income trading desks considerably – choosing to focus on the equities market instead. The restrictions on proprietary trading activities apply to both forms of trading, and the debt market has also demonstrated considerable volatility over the last couple of years.
As the number of banks shifting focus on the equities market continues to rise, it is worth taking a look at which of these banks is doing better than its peers. In an attempt to answer this question, we look at the 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) – since early 2011.
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 eleven 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 (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||Q2 2013||Q3 2013|
|Bank of America||1,299||1,046||753||652||1,059||780||715||713||1,149||1,194||970|
The first thing that is evident from the table above is the reason why the equities trading desk draws so much criticism from investors from time to time – the huge volatility it involves. Goldman Sachs in particular demonstrates wildly fluctuating revenues – from profits of $2.3 billion in one quarter to losses of nearly $1.3 billion all within two quarters. In contrast, none of the other investment banks booked a loss or even reported dismally low equity trading revenues over the period. Goldman, therefore, appears to be more open to taking big risks in its market making, hedging and algorithmic trading operations.
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 numbers.
|(in $ mil)||Avg. Total Rev.||Avg. Equities Rev.||Equities/Total Rev.||Standard Dev.|
|Bank of America||22,204||939||4.23%||226|
This table includes the average total revenues each bank reported over the same eleven-quarter period and has been sorted based on the average equities revenues earned in a quarter. Quite notably, Morgan Stanley stands out in this regard – generating just over $1.5 billion from its equities trading desk. This is more than 20% of the bank’s total quarterly revenues – a little more than the 16% it generates from fixed-income trading on average – making Morgan Stanley the only bank among the five to make more money from equities trading compared to fixed-income trading. And it seems to be doing a good job given its low standard deviation figure, which is 5.5% of its average quarterly revenues and well below all its competitors in percentage terms.
The observation we made about Goldman’s risk-taking approach is validated again here, as the standard deviation of its quarterly equities trading revenues is equal to 80% of its average revenues – representing extremely high volatility. On the other hand, diversified banking giants JPMorgan and Bank of America demonstrate near-identical performances with average revenues of around $1 billion with a standard deviation of between 20-25% of this figure.