Despite meme stocks and cryptocurrencies, markets have been pretty calm so far in 2021. That means bad news for Wall Street trading desks.
Volatility unleashed by the pandemic helped Wall Street to bumper profits last year. As clients raced to place big bets, firms that helped execute those trades raked in big fees. The Big Five — JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley — collectively made $105bn from equity and fixed income trading in 2020. That is a 35 per cent increase from 2019, according to Lex calculations.
But the pandemic-era trading boom has run out of steam following a rapid vaccine rollout and growing optimism over a US economic recovery.
The latest sign of this can be found in the Vix index. Wall Street’s so-called “fear index” fell to a pandemic-era low of 15.7 points this month. This gauge of US equity market volatility sits below its long-term average of 20, having surged to a record high of 82.7 in March 2020.
Already bank chiefs have begun dampening investors’ expectations ahead of second-quarter earnings next month. JPMorgan boss Jamie Dimon said this week trading revenue will be just “a little north of $6bn”, compared to nearly $10bn a year ago. Citigroup warned that trading revenue will fall 30 per cent.
Investment banking provides some ballast. While the pace of initial public offerings, Spac deals and merger and acquisition activity during the second quarter may have slowed from the first quarter, it remains up year-on-year. Global M&A deals doubled to $1.3tn, on Refinitiv data.
Regular banking should return. Loan growth — so slow throughout much of last year — should pick up later this year. Rising interest rates and loan pricing, with an improving economy, should boost banks’ net interest margins.
For bank bosses, the trading desks’ purple patch will remain useful for long after bonuses have been spent and dividends paid out. Those profits have proved the value of the universal banking model, whose high costs had left it unloved before the pandemic broke out.
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