The trading boom that helped reshape global investment banks over the past decade is sputtering, raising fears that one of Wall Street’s biggest profit engines is in peril.
Executives have warned that lackluster markets could lead to year-over-year declines in fixed-income, commodities and currency trading revenue when banks begin reporting fourth-quarter results next week. That would mark the fourth consecutive drop and the 11th in the past 16 quarters.
Few corners of banks’ trading operations have escaped the slump. A 10-year commodities rally has fizzled, while foreign-exchange trading volume has fallen sharply from its 2008 peak. Since the financial crisis, investors have eschewed exotic fixed-income securities in favor of low-risk government bonds, which are less profitable for banks, and overall trading volumes have dipped.
A rash of new regulations, meanwhile, have prompted Wall Street firms to exit from once-lucrative businesses such as energy trading and storing and transporting physical commodities.
The slump has gone on so long that some observers are beginning to question whether it is part of an ordinary down cycle or a more permanent shift.
“I think it is worrying,” said Oppenheimer analyst Chris Kotowski, who expected trading revenue to have hit bottom and stabilized by now. “You can’t turn around a fundamental trend…if that’s what this is.”
Mr. Kotowski cited the big transformations that have rocked global markets in the past few years, such as new technologies. Those advances have helped level the playing field by allowing institutions to make some trades on their own, reducing the amount banks bring in for matching up orders.
For Goldman Sachs Group Inc., fixed-income, currency and commodities trading historically has been a crucial profit engine. Yet the New York investment bank is expected to post a 21% decline in trading revenue….”
