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August 31, 2004

Stock Trading Revenues Dipping at the Big Shops

By Peter Chapman

Equity trading revenues are sagging at some of the Street's biggest houses.

Commissions and trading revenues fell significantly at a group of the biggest equities shops during the second quarter. Following a strong start in the first quarter, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Bear Stearns and Jefferies Group all reported weaker second quarter results.

The trend suggests a softer second half, according to the Securities Industry Association. "Recent and expected trends point to a slowing of top line growth," reports Frank Fernandez, the SIA's chief economist, "leading to a narrowing of the bottom line for the remainder of this year."

Goldman Sachs took the biggest hit. The big bank recorded a 35 percent drop in the revenues of its vast equity trading franchise. Driving the drop was a loss in its proprietary trading business. "You can be right in the long term, but wrong in the short term," David Viniar, Goldman's chief financial officer, told analysts recently, "which is what partially happened. It was a broad combination of different positions that went against us."

Merrill Lynch reported a 23 percent revenue decline. The shrinkage came in both cash equities and derivatives trading. Derivatives grosses were down because of lower volatility, according to Merrill CFO Ahmass Fakahany. Cash equities slowed "as many institutional investors chose to remain on the sidelines." Bear Stearns' derivatives trading also slowed because of lower volatility. "The derivatives business has been struggling for the past several quarters," said CFO Sam Molinaro.