The Combined Equity Trading Portfolio of The Five Largest U.S. Investment Banks Could Reach $540 Billion In Five Years

by Trefis Team
Morgan Stanley
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Equity trading is a key revenue source for an investment bank, which has seen several ups and downs over the last decade. In order to understand it better, Trefis has analyzed the Equity Trading Portfolio of the 5 largest U.S. Investment Banks in an interactive dashboard. The banks included in our analysis are Citigroup, Morgan Stanley, JPMorgan Chase, Bank of America, and Goldman Sachs. Besides summarizing the trends in this portfolio over the years, the dashboard includes our forecast for the equity trading portfolio for each of these banks, and also captures the impact of changes on their Securities Trading Revenues. Additionally, you can see more Trefis data for financial services companies here.

What is Equity Trading?

It involves trading in equity securities and equity-related products, including exchange-traded funds, convertible securities, options, futures and over-the-counter (OTC) derivative instruments. Investment banks usually maintain a portfolio of equity securities to allow meet clients’ equity trading demand. Morgan Stanley is the market leader in the Equity Trading space and has derived around 20% share of its Total Revenues from equity trading over the last 10 years.

How Has The Equity Trading Portfolio For These Banks Changed, And What Can We Expect Going Forward?

  • The equity trading portfolio for the largest banks was $425 billion in 2006, and swelled considerably before the downturn, before slumping to $352 billion in 2009. The figure has largely trended higher over the years, but was hurt in late 2018 due to the equity market selloff.
  • New Regulations enacted in the aftermath of 2008 meltdown has stifled Equity Trading
    • Volcker Rule: It prohibits proprietary trading by banks which was one of the main sources of revenue.
    • Dodd-Frank Act and Basel III Capital Rules: They increased regulatory oversight and limited Bank’s ability to use borrowed money for trading.
  • Drop in Trading Portfolio value signals negative market outlook which is quite evident from 2009 figure.
  • In 2018, lower equity valuations coupled with higher interest rates and negative market sentiment resulted in an overall decrease in Equity Trading Asset value.
  • In Q1 2019, Equity market recovered from 2018 level due to improved market conditions. We expect the trend to continue and increase trading assets at an annual rate of 4-5% over next five years leading to a figure of $524 billion by 2023. However, Equity Trading revenues are expected to grow at a slower pace and cross $33 billion in next five years.

How Has Equity Trading Yield Changed Over Last 10 Years?

Average Equity Trading Yield = Total Equity Trading Revenues ÷ Total Equity Trading Assets.

  • Average Trading yield was highest in 2008 at 8.9% as a massive sell off in Equity markets towards the end of the year resulted in a sharp reduction in the portfolio size
  • It gradually decreased over 2008-2012 and was lowest in 2012 at 5.2% which was driven by high economic uncertainty in the wake of the European debt crisis and low client activity.
  • Although the yield recovered over 2012-2017, the figure was unusually high at 7.5% in 2018 due to the slump in asset value in December.
  • We expect the average yield for the banks to be around 6.3% over coming years.

The green-to-red shading for figures along a column show the variations in equity trading asset base and equity trading revenues for top 5 US investment banks in a particular year.

Key Revenue Observations Over The Last Decade (2009-2018):

  • Total Equity Trading revenue was highest in 2018 ($31.8 billion) and lowest in 2012 ($22.7 billion). The average annual revenue over this period was $26.8 billion.
  • Goldman Sachs has shown strongest performance among its peers with highest annual Equity Trading revenue of $10.8 billion in 2009 and highest average annual revenue of $7.8 billion.
  • Citigroup was the weakest performing bank in Equity Trading with lowest annual revenue of $2.5 billion in 2009 and lowest average annual revenue of $3 billion.


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