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March 1, 2013

Top Five Took In Less Last Year

By Mary Schroeder and Peter Chapman

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  • Top Five Took In Less Last Year

If all the talk of layoffs last year wasn't enough proof, the financial results from the five biggest U.S. equities houses confirm it: Last year was worse than the year before.

Collectively, the equities departments of Goldman Sachs, Morgan Stanley, J.P. Morgan, Merrill Lynch and Citigroup took in $1 billion less last year than they did in 2011.

The five firms grossed $23 billion in 2012, down from $24 billion the previous year, or a decline of about 4 percent. The data excludes adjustments for credit and debit valuations. It also excludes the approximately $1 billion and $800 million in revenues from Goldman Sachs' reinsurance activities during 2012 and 2011, respectively.

There was no single explanation for the drop, as the giant banks operate in markets across the globe in both cash equities and equities derivatives. Less customer activity in both cash equities and derivatives got the blame, as well as shortfalls in interest from prime brokerage businesses.

It could have been worse. Goldman actually reported higher revenues last year, but that was due to a onetime sale of its hedge fund administration business to State Street. Goldman booked a $500 million gain on that trade.

Howard Tai

The banks do not break out the components of their equities revenues, but an analyst at J.P. Morgan Cazenove in London made an attempt to do so in 2011. Excluding his own firm, Kian Abouhossein figured the other four take in between 24 and 40 percent of their revenues from cash equities, and between 27 and 37 percent from equity-linked derivatives.

These numbers may have changed as some of the firms have shut down their prop trading desks. That business represented between 9 and 15 percent of revenues in 2011, Abouhossein estimated.

Prime brokerage is a significant endeavor at the firms, representing between 18 and 34 percent of revenues, the analyst estimated.

According to Howard Tai, a senior analyst with Aite Group, last year's decline was the result of lower volumes in both equities and derivatives trading. That is clear from data supplied by the World Federation of Exchanges. The organization found that worldwide share volume dropped 22.5 percent last year, while volume of exchange-traded equity derivatives contracts fell 20 percent.

(Full-year data covering over-the-counter equities derivatives contract volume is not yet available from the Bank of International Settlements.)

Tai explained that the drop in trading volumes of U.S. shares is due to the shift of institutional and investor money from equities to fixed income. Also, retail investors continue to suspect that the market infrastructure is stacked against them in favor of high-frequency traders, at least from an intraday trading standpoint, he said.

At the same time, lower market volatility reduced the need to hedge with derivatives, he said. The CBOE Volatility Index, or VIX, has fallen from a peak of 79 in October 2008 to 12.6 recently. That is the lowest level since the credit crisis erupted in September 2008.