(Bloomberg) — Bank of America Corp. and Citigroup Inc. said trading revenue will probably fall this quarter, providing fresh evidence Wall Street is headed for its fourth annual decline in the past five years.
Citigroup expects trading revenue to slide about 5 percent from the fourth quarter of 2013, Chief Executive Officer Michael Corbat said Tuesday at a conference hosted byGoldmanSachs Group Inc. in New York. Bank of America forecast a decline in trading revenue from both the third quarter and a year ago, CEO Brian T. Moynihan said at the same conference, without giving an estimate for the size of the drop.
Wall Street trading revenue has been squeezed by the rise of electronic trading and periods of low volatility that crimped spreads, as well as new rules that limited bond inventories and restricted firms ability to speculate for their own accounts. Trading revenue at the 10 largest global investment banks dropped by $70 billion, or 38 percent, from 2009 to 2013, according to data from industry analytics firm Coalition Ltd.
What wed love to see is a trending market with sustained, reasonable levels of volatility, Corbat said. Markets today lack trend, lack direction and I think they lack a uniformity in terms of view.
Some investors were blindsided in the first two weeks of October as stocks and corporate debt sold off and interest rates dropped because of concerns that global growth was slowing. While most markets rebounded in the second half of the month, oil tumbled into a bear market and reached a five-year low last week as the U.S. shale boom added to a worldwide glut amid slowing growth in demand.
Fed Taper
Traders have been trying to predict the path central banks will take to higher interest rates as the global economy recovers from recession. The Federal Reserve began tapering its bond purchases in December 2013 and has said it will respond to new economic data when setting monetary policy.
If investors became comfortable with the path rates were taking higher, it could create volatility that generates wider big-to-offer spreads, Corbat said. But its that one-off nature, some of this volatility we are seeing today, that I think is quite difficult to trade.
Trading revenue at New York-based Citigroup dropped 9 percent to $12.1 billion in the first nine months of the year, while Bank of America posted a 2 percent increase to $10.8 billion. JPMorgan Chase & Co., the biggest trading firm globally, reported an 11 percent drop in revenue.
Revenue Headwind
Bank of America, based in Charlotte, North Carolina, said in a presentation that trading is among its revenue headwinds after generating $3.27 billion in the third quarter and $2.97 billion in the fourth quarter of last year.
Chief Operating Officer Tom Montag has cut costs in the markets division, reducing the amount of trading revenue needed to break even to $2.5 billion a quarter from $3.5 billion a few years ago, Moynihan said.
When activity ebbs and flows, we dont try to replace that activity with non-customer-driven business, Moynihan said. We stick to our knitting.
Citigroup also said today it will report $2.7 billion of legal costs in the fourth quarter and $800 million in expenses tied to headcount and real estate. The shares dropped 2 percent to $55.25 at 12:09 p.m. in New York trading. Bank of America slipped 1.8 percent to $17.34.
