2017 was a successful year for global stock markets, but Wall Street banks bypassed this holiday. Calm December was the logical conclusion of the unremarkable year for traders.
A decrease in trading income threatens traders with a reduction in bonuses. Managers and consultants do not rule out a partial folding of this business, reports Dow Jones.
The dull ending of the year contrasts with its peppy start. The 2016 US presidential election, the long-awaited increase in interest rates and the political struggle in Europe – all this at the beginning of the year caused a revival in the markets.
Stock markets rose all year: for example, the American Dow Jones Industrial Average updated record highs close 71 times.
However, trading on stock exchanges, bonds, currencies and other assets was so calm that sophisticated traders became less in demand. In addition, it has become more difficult for them to capitalize on price fluctuations.
CEOs of JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. in recent weeks, they said that in the 4th quarter their revenue from trading will fall by 15% year on year.
This means that over the year, trading income will decrease by 5% –10%. In 2016, these three banks earned $ 50 billion in trading operations, about a fifth of their total revenue.
In the first 9 months of the year, sales of the ten largest banks in the world fell by 5%. Revenue from operations with shares decreased by 2%. Fixed income asset trading generated 7% less revenue.
This segment includes corporate and government debt securities, currencies, commodity assets, interest rate instruments, and other specialized assets.
"No one is immune from this," said Davin Ryan, an analyst at JMP Securities Investment Bank. "The situation was really complicated."
Investors recently prefer passive index fundswhere trading volumes are lower.
“It’s worth taking a sober look at things: the world is not the same as 8 or 10 years ago,” says Alan Johnson, who advises banks on the payment of fees. “It's time to stop hoping for the return of the old trading conditions.”
According to Options Group financial recruiting company, the average remuneration for traders will decrease by about 7%. The exact figure will become clear in January, when paying bonuses. The greatest decline threatens stock traders, as many of their tasks are now performed by computers. For those who know how to program, the situation will not be so critical.
Many felt that Wall Street again smiled on luck, and hastened to hire new traders. At the beginning of 2017, London banks tried to lure experts on interest rates, promising them a 30% pay increase, said Jessica Lee of Options Group. A year ago, there was excitement in the trading departments.
Britain's decision to withdraw from the EU revived trade in the British pound, European government bonds and interest-bearing instruments. The unexpected victory of Donald Trump also played a role.
In 2016, the trading revenue of the five largest US banks increased by 4%.
However, in 2017 there were fewer macroeconomic shocks. “The number of catalysts has decreased, the dynamics have become smoother,” JPMorgan fund director Marianne Lake said in December.
Nothing was able to stir up the markets.
Investors disregarded sensitive topics, including North Korea’s nuclear tests and an investigation into the White House’s ties to Russia.
According to JMP Securities, the volume of trading in treasury bonds from December 1 to 22 was 8% lower than a year earlier, despite the fact that the Fed raised interest rates on December 13.
The VIX index, which characterizes the degree of market fluctuations, updated the lows in December. Trading volume on key US stock exchanges this quarter fell by 11% compared with the same period last year, notes JMP.
The volume of transactions with corporate bonds increased, but the difference between the sale and purchase prices decreased, so the profit of banks acting as intermediaries fell.
The outgoing year was favorable for investment banking. The IPO market warmed up after a sluggish 2016. The mergers and acquisitions boom continued. Companies were quick to take advantage of low interest rates for issuing bonds.
According to Options Group estimates, the remuneration of investment bankers for this year will increase by 10%.
More routine assets management and private banking businesses were not left unprofitable, says Alan Johnson. These units require less capital and generate lower, but more stable profits than trading and investment banking. Shareholders value them just for predictability.
“Wall Street is evolving,” Johnson said.