Equity Trading Revenues Declined In Q3 Due To Low U.S. Equity Market Volatility

by Trefis Team
Morgan Stanley
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U.S. investment banks could not fully benefit from the steady rally in the country’s equity market over the third quarter, as the rally was characterized by unusually low volatility. In fact, the CBOE Volatility Index (VIX) fell to an all-time low of below 9.4 in late July, while largely hovering around 10 over the months of July and September and averaging about 12 for August. As values below 20 are interpreted as being indicative of an stable outlook for share prices, the extremely low VIX figures highlight the reduced market-making opportunities for investment banks over the period. Notably, the VIX fell to below 9 for the first time in October – something that will weigh on revenues for the seasonally slow fourth quarter as well.

That said, the banks would have benefited from mark-to-market gains for the period, which helped total equity trading revenues for the five largest banks fall just marginally compared to the figure a year ago. Morgan Stanley held on to the top spot globally in the industry for the tenth consecutive quarter, with revenues just shy of $1.9 billion. Morgan Stanley’s equity trading desk contributes almost 25% of our $50 price estimate for the banking giant’s shares.

Global equity markets have been largely upbeat over 2017, with the U.S. stock market scaling record highs over the period. However the year has also seen a steady decline in equity market volatility, which negatively impacted equity trading activity. Thankfully, mark-to-market gains mitigate the impact on equity trading revenues for the five largest U.S. investment banks. Notably, the relative standings of these five banks have remained unchanged since Q2 2015 – the quarter when Morgan Stanley cemented its position at the top of the list by pushing Goldman to the second spot.

Morgan Stanley dominates the equity trading business, with the investment banking giant holding the top rank globally in 14 of the last 17 quarters (Goldman topped the list on the other three occasions). Unlike its other U.S.-based peers, Morgan Stanley implemented sweeping changes to its business model over 2011-2012 to shift the focus of its business model away from fixed income trading and towards equity trading. And the bank has has done well to report average equity trading figures of $2 billion over the last seven quarters – higher than any other investment bank globally. In fact, second-ranked Goldman Sachs reported an average figure of $1.74 billion over the same period.

You can see how changes to Morgan Stanley’s equity trading yield impacts our price estimate for the bank by modifying the chart below.

See the links below for more information and analysis about the 5 largest U.S. investment banks:

See full Trefis analysis for Goldman SachsJPMorganMorgan StanleyBank of America | Citigroup

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