Goldman’s Equity Trading Desk Fell Behind JPMorgan In Q2, And It May Not Be A One-Off Event

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An increase in capital market volatility, coupled with upbeat investor sentiment, helped boost equity trading revenues for most investment banks over the second quarter of 2018. Notably, while four of the five largest U.S. investment banks reported a year-on-year jump in equity trading revenues of at least 15%, Goldman Sachs stood out with a marginal reduction in these revenues. This, in turn, resulted in Goldman falling to the #3 position among these banks in terms of total equity trading revenues for the first time in ten years.

We capture the trends in equity trading revenues in detail as a part of our interactive model on how trading revenues for the largest U.S. banks have changed over the years. We highlight key observations related to their equity trading revenues below.

The U.S. equity market was characterized by unusually low volatility over the second half of 2017 – a trend that was also evident in early 2018. However, several geopolitical factors (including the threat of a global trade war) resulted in a jump in market volatility in February. Although market volatility fell again over the second quarter, it remained well above the levels seen late last year. Coupled with a strong rally in equity market valuations, this helped investment banks realize generate strong market-making fees as well as mark-to-market gains.

The five largest U.S. investment banks reported almost $8.5 billion in equity trading revenues for Q2 2018 – 13.6% higher than the figure a year ago. It should be noted that the second quarter is seasonally a slower period compared to the first quarter. The strong showing by these banks is evident from the fact that the average combined equity trading revenue for these banks was $6.5 billion for a quarter over 2010-17. The table below details the trends in equity trading fees for each of these banks in the last five quarters. The green-to-yellow shading along a column highlights the relative performance of each bank in any given quarter.

Goldman’s relatively soft showing in Q2 allowed JPMorgan to supplant it in the #2 position this time around. While Goldman attributes the weak revenue figure to subpar derivatives revenues for the quarter, we believe that it may not be a one-off event, at least in terms of the banks’ rankings.

Goldman historically dominated these rankings by figuring at the top in nearly every quarter from the downturn up until Q2 2015, when Morgan Stanley dethroned it thanks to its refocused equity trading operations. Additionally, while Goldman’s average equity trading revenues have fallen from more than $1.9 billion over 2010-15 to below $1.8 billion since Q1 2016, JPMorgan has done well to boost these revenues from an average of $1.2 billion over 2010-15 to almost $1.55 billion since Q1 2016. The narrowing gap is an indicator that JPMorgan is eating into Goldman’s market share – and we expect this trend to continue going forward. With an equity trading desk that rivals Goldman’s in size, JPMorgan is likely to figure at the #2 position more frequently in the future.

Details about how changes to Securities Trading Fees affect the share price of these banks can be found in our interactive model for Goldman Sachs | Morgan Stanley | JPMorgan Chase | Bank of America | Citigroup

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