Big Banks’ Traders Find Bust and Boon in Unpredictable Markets

(Bloomberg) -- Wall Street’s stock traders are celebrating the long-awaited return of volatility to the market. Their colleagues handling fixed-income products are struggling to keep up.

Equities-trading revenue jumped more than 25 percent at both JPMorgan Chase & Co. and Citigroup Inc. in the first quarter. The increases blew away analysts’ estimates and helped counter disappointing results from fixed-income desks, which some executives said ran into tough markets in March.

The banks showed they’re capable of benefiting from stock-market turmoil -- a question that’s loomed over Wall Street this year. But how that turbulence affects bond traders depends on who you ask. After Citigroup’s fixed-income trading revenue fell 7 percent, missing estimates, Chief Financial Officer John Gerspach blamed excessive swings in asset prices in March, noting “when you get significant volatility it isn’t helpful.” At JPMorgan, CFO Marianne Lake said the stock turmoil wasn’t enough to ignite trades in other products. Its adjusted revenue from fixed income, currencies and commodities was about the same as a year earlier.

“FICC is still soft and underwriting isn’t great,” said Jim Shanahan, an analyst at Edward Jones. The problem for banks such as Citigroup and JPMorgan is that they lean harder on their debt-trading desks for revenue. “The relative size of fixed income is the reason why investors focus on it.”

JPMorgan and Citigroup both declined about 2.8 percent at 11:18 a.m. in New York as major U.S. indexes also fell.

Citigroup pointed to a slump in client activity in Group-of-10 rates and spread products. One bright spot, it said, was strong corporate-client activity in exchanging major currencies, as as well in local-markets rates and currencies.

Big Banks’ Traders Find Bust and Boon in Unpredictable Markets

Stock volatility spiked in February after a report on U.S. job creation shook up projections for interest-rate increases. In the weeks that followed, Trump kept investors on their toes by ratcheting up threats on Twitter to impose tariffs on Chinese goods.

In recent years, banks have engaged in a technological arms race to provide the fastest pipes for quantitative trading clients dealing in microseconds. Those efforts paid off as volumes jumped on major exchanges. The turmoil also gave human traders at banks a chance to pitch more tailored products.

“Most market watchers expect volatility to be elevated moving forward, and it’s a good thing for the trading desks,” Chris Walsh, an analyst at Buckingham Research, said by phone. “We think the most clear read-through is to Morgan Stanley, and we expect them to report an outsized performance given their exposure to equities.”

Morgan Stanley and Goldman Sachs Group Inc., where equities trading accounts for a larger share of revenue, post earnings next week, as does Bank of America Corp.

JPMorgan’s equities traders generated a record $2.02 billion of revenue, a 26 percent gain that beat analysts’ estimates. Citigroup’s revenue from that business surged 38 percent to $1.1 billion in the quarter, the best since 2010.

Lending operations at JPMorgan and Citigroup also benefited as the Federal Reserve raised rates twice in the past four months. Both firms saw net interest income climb at least 2 percent. Wells Fargo & Co. didn’t partake, as its interest income dropped 1 percent after the Federal Reserve prohibited the scandal-plagued bank from increasing assets until it addresses its missteps.

While Wells Fargo said Friday that profit jumped 5.7 percent, that may be short-lived. The firm warned Friday that it may take a charge of as much as $1 billion to settle a U.S. probe of its consumer business.

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