Banks around the globe have made significant changes to their trading operations over recent years to comply with strict regulations aimed at reining in the volatile business. While proprietary trading desks are a thing of the past with the implementation of the Volcker Rule, some of the banks were also forced to take a hard look at their capital-intensive debt trading operations in the wake of steeper capital requirement norms. Despite the upheaval in the industry at large, trading still remains one of the most lucrative revenue streams for banking giants around the globe.
We detailed the performance of the debt and equities trading desks at each of the country’s five largest investment banks – Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) – earlier this week as a part of our articles How Important Is Debt Trading To The Largest U.S. Banks? and How Goldman And Morgan Stanley Dominate Equities Trading. In this article, we present a side-by-side view of the total trading revenues generated by these banks over the last three years while analyzing the relative importance of the two trading desks for each of the banks.
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Trading Operations Have Hit A Rough Patch…
The table below summarizes the revenues each of the five largest U.S. banks generated through their trading activities 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|
|Bank of America||5,189||3,335||3,249||2,501||4,150||3,453||3,003||2,984||4,103|
As the table demonstrates, these five banks bring in around $20 billion in revenues through trading activities each quarter. The seasonal nature of the industry is also evident here, with Q1 being the strongest quarter for investment banks and Q4 being the weakest. Notably, revenues for each of the last three quarters (Q3 2013 to Q1 2014) have been considerably lower compared to the same period the previous year. This is due to two primary reasons: an overall reduction in trading activity over the period (a temporary factor) and a reduction in total market size as a direct result of stricter regulations (a permanent factor). Given that JPMorgan and Citigroup have already stated that this quarter was a slow one for trading, we can expect the temporary factor of poor trading activity to linger for a couple of months more.  While trading revenues are likely to pick up later this year, the lasting impact of tighter regulations means that these revenues are unlikely to ever reach the record levels seen in 2010.
Among the banks, JPMorgan has the distinction of earning the most from trading activities for more quarters than any of its competitors – making the most money from trading operations in 12 of the last 13 quarters. Goldman Sachs grabbed the top spot in Q4 2012. Notably, Morgan Stanley ranks last in 11 of the last 13 quarters, which highlights the reduced focus on trading activities by the bank in order to grow its wealth management business.
… But Still Account For Almost A Quarter Of Total Revenues
The following table consolidates the total trading figures into a single set of numbers along with each bank’s average total revenues over the last thirteen quarters. The data has been sorted based on the average trading revenues earned in a quarter.
|(in $ mil)||Total Revenues||Trading Revenues||Trading/ Total||Std. Dev.||Std. Dev./ Mean|
|Bank of America||22,177||3,371||15.2%||1,092||32.4%|
JPMorgan makes roughly $5 billion in trading revenues each quarter followed by $4.3 billion on average for Goldman. Despite making the most revenues from trading operations among the banks, JPMorgan actually earns almost 80% of its total revenues from other sources – highlighting the extent to which the bank has diversified its business model. On the other hand, Goldman’s trading operations account for more than half its total revenues. The predominantly investment banking-focused Morgan Stanley strikes a balance here with trading operations accounting for a little more than a third of its total revenues.
Fixed Income Desks Still Dominate
The next table shows what proportion of the trading revenues for each bank came from the fixed income and equities desks, respectively.
|FICC:Equities||Q1 2012||Q2 2012||Q3 2012||Q4 2012||Q1 2013||Q2 2013||Q3 2013||Q4 2013||Q1 2014|
|Bank of America||80:20||77:23||78:22||71:29||72:28||65:35||68:32||70:30||72:28|
On average, fixed income operations contribute roughly two-thirds of the total trading revenues of these banking giants and equities trading brings in the remaining third. But there is a lot of variation in this figure across banks. While Citigroup relies on fixed-income trading more heavily than the others (approx. 80:20), Morgan Stanley’s focus clearly weighs towards equities trading. Goldman seems to give both its trading desks roughly the same amount of importance with their respective share fluctuating considerably over quarters.
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