Big Banks See 7.1% Drop in Trading Revenues
Traders Magazine Online News, January 25, 2013
Equities trading revenues declined 7.1 percent in 2012 for five big investment banks, even though overall daily volume on U.S. markets fell 18.5, according to financial reports released last week.
Overall, revenue for the five banks fell to $21.8 billion from $23.4 billion in 2012, based on their financial reports for the fourth quarter and full year.
Three big traditional investment banks, Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley, reported an average decline in revenue of 11 percent for their institutional equity trading businesses for the year ending Dec. 31, 2012.
Revenue for the three banks dropped from $6.1 billion in 2011 to $5.5 billion in 2012, according to year-end figures released by the banks.
Faring better were Citigroup, which saw its equity markets revenue stay essentially flat, at $2.4 billion for the year, and J.P. Morgan Chase, which saw a drop of 1.6 percent to $4.4 billion in its equities markets business.
The revenue declines are the result of lower volumes in both equities and derivatives trading, said Howard Tai, a senior analyst with Aite Group.
However, while the large banks have suffered a revenue decline, they are faring better than smaller firms, said Larry Tabb, founder and CEO of Tabb Group. “We have seen a number of smaller firms go under.”
Newedge UK Financial, Ticonderoga Securities, WJB Capital, Kaufman Bros., Momentum Trading Partners, ThinkEquity LLC, Rodman & Renshaw LLC and WJB Capital Group Inc.all shuttered their equities trading operations last year.
Trading Volume Down
The revenue declines come as average daily trading volume was down 18.5% in 2012, according to consolidated statistics recorded by the Nasdaq OMX Group.
The drop in trading volumes is due to the shift of institutional and investor money from equities to fixed income, Tai said. As well, 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 reduces 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 on Thursday. That is the lowest level since the credit crisis erupted in September 2008.
Indeed, according to The World Federation of Exchanges’ (WFE) annual survey of global markets, the number of on-exchange equity derivatives contracts traded in 2012 decreased for the first time since 2004, dropping by 20.4 percent to 14.9 billion.
The drop in equity derivatives is probably explained by the significant decrease in volatility observed in 2012, WFE said.
Another challenge for banks’ institutional equity trading businesses is that equities are primarily traded electronically, with minimal commissions, Tai said. The margins for IPOs and secondaries are a lot higher, “so you need for companies to come to the stock market to raise money.” But with interest rates so low, they are going to the debt market instead, he said.
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