Morgan Stanley Looks On Course To Post Record Equity Trading Revenues For Full-Year 2018

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There was a notable reduction in capital market volatility over the third quarter of 2018 from the elevated levels seen over the first half of the year. While this hurt equity trading revenues in Q3 compared to the figures for Q1 and Q2, favorable investor sentiment helped these revenues for the five largest U.S. investment banks improve meaningfully from the figures seen a year ago. Morgan Stanley gained from improved conditions in particular, as the investment bank leveraged its market-leading position in the equity trading industry to churn out more than $2 billion in revenues for the third consecutive quarter – a first for any investment bank since the economic downturn. More importantly, as market volatility was evidently higher over the months of October and November, Morgan Stanley is likely to extend this strong performance for at least one more quarter – potentially raking in a record $9.1 billion in equity trading revenues for full-year 2018.

We capture the trends in equity trading revenues in detail as a part of our interactive model on how equity 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 and third quarters, it remained well above the levels seen late last year. Coupled with a strong rally in equity market valuations, this helped investment banks generate strong market-making fees as well as mark-to-market gains. It should be noted, though, that the seasonal securities trading industry sees the most activity in the first three months of the year, with the demand for these services generally declining as the year progresses.

The five largest U.S. investment banks reported almost $7.2 billion in equity trading revenues for Q3 2018 – 7.7% higher than the figure a year ago, but down 15% sequentially. But the fact that average combined equity trading revenues for these five banks stood at $6.5 billion per quarter over 2010-17 indicates that Q3 2018 was still an overall good period for investment banks. 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 historically dominated these rankings by figuring at the top in nearly every quarter for years until Q2 2015, when Morgan Stanley dethroned it thanks to its refocused equity trading operations. Since then, Morgan Stanley has stayed at the top of this table for 14 straight quarters. More importantly, the investment bank reported revenues in excess of $2 billion for each of the last three quarters, and is likely to do so yet again in Q4 (as this requires a nominal 4% year-on-year increase from the $1.92 billion in equity trading revenues for Q4 2017). This would imply total trading revenues of roughly $9.1 billion for Morgan Stanley for the year, which is slightly higher than the record level of $9.02 billion for the bank in 2008. That said, Goldman Sachs still holds the record for the highest equity trading revenues in a year, as it made $11.3 billion from its equity trading desk in 2007 in the run-up to the recession. But stricter regulatory requirements since the downturn (especially the restrictions on proprietary trading activities) make it extremely unlikely that any bank will do better than that anytime in the foreseeable 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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