JPMorgan Chase and Citigroup reported lower trading results for the second quarter and the signs aren’t pointing to a rebound in the fall.
Bankers had already warned in recent weeks that revenue from bond and stock trading would be lower than the strong first quarter and compare less favorably to the second quarter last year, when markets were jolted by the United Kingdom’s vote to leave the European Union. There wasn’t any such excitement this year to stoke the volatility needed to boost trading.
Stock trading wasn’t robust, either. JPMorgan said revenue in that business was down 1 percent from last year’s second quarter and this year’s first quarter. It’s up about 1 percent for the year. At Citigroup, equity trading fell 11 percent, reflecting “episodic activity in the prior year period, as well as low volatility in the current quarter.”
The expectations aren’t high for other big banks due to report later this month, including Goldman Sachs, Morgan Stanley and Bank of America, whose CEO said last month that trading revenue was likely to be lower than last year.
Trading once propelled Wall Street’s big banks to big profits, but the business has taken a hit from increased regulation and market forces driving profit lower.
Low volatility is a culprit, too. The CBOE Volatility Index, otherwise known as Wall Street’s “fear gauge,” is near decade-old lows and doesn’t seem ready to reverse course. The Federal Reserve is sticking to its plan to gradually raise rates, and uncertainty about how much of President Donald Trump’s agenda will get done hasn’t stopped markets from rallying.
“While it wouldn’t be herculean to suggest volatility rises a bit from here, barring anything that comes out of left field, we don’t envision a strong advance,” said Bryan Reilly, a senior investment analyst at CIBC Atlantic Trust.
A broad shift by investors away from actively managed funds to passive, index strategies is exacerbating the problem, Reilly says, by reducing the amount of portfolio turnover that would give bank trading desks something to do.