Is equity trading the new FICC?

IFR 2044 2 August to 8 August 2014
6 min read
EMEA

I HAD LUNCH the other day with a mate who’s spent much of his career to-date broking or trading fixed-income, and much of that working for inter-dealer brokers. The bookies play a key role in oiling the wheels of the broker-dealer machine, squirting whatever liquidity there is around the market. As such, they’ve always been among the best judges of what’s really going on out there and are typically among the first to get a whiff of upturns or downturns.

Long story short: after close to 12 years in his most recent role, he’s thinking about knocking it on the head and calling time on his days in the trenches. He told me that in all the years he’s been broking, he’s never encountered an environment of such prolonged slump. He’s lost a lot of his clients as they’ve been made redundant or re-purposed; there’s simply no action, he told me. Management has already given notice that the bonus pool is running on empty, and for a lot of staff it’ll be salary-only this Christmas.

I wondered about his timing, though, because his of-the-moment narrative does run counter to some slightly more upbeat chatter around the major investment banks’ second-quarter earnings, both generally but specifically in FICC.

I’m getting a sense that the mood is shifting around fixed-income trading. We have seen a moderate deceleration in the overall rate of decline in FICC earnings. The number are still far from positive and in truth there’s little really to shout about, so I caution market pros and watchers to exercise restraint in what they think this all means until we have several quarters of data.

Equity trading revenues are pretty awful yet have escaped any real scrutiny

ONE THING’S FOR sure: there’s no way you can call a turn in the market on the basis of just one or two mediocre rather than dreadful quarters for the industry (notwithstanding in fairness some decent numbers at select firms in Q2). But if you look beneath the net revenue numbers, there is greater differentiation appearing now in how the overall number is made up, which I think bodes well as it plays into value-add and competitive advantage.

It’s easy to forget that FICC is an umbrella of several businesses that may play to the same broad macro trends but that in essence can react to some very different micro themes.

Broadly speaking, you can see why Q2 FICC numbers might give more courage to firms such as Deutsche Bank (where debt trading accounts for 47% of corporate banking and securities net revenue, and 26% of consolidated group net revenue) to slug it out to the bitter end. Not that Anshu Jain and Juergen Fitschen have much choice given the composition of group earnings and their reliance on FICC, but still…

I also wonder, if we do start to see better q-on-q FICC data, where any pivot point may lie that might encourage Barclays CEO Antony Jenkins to conduct another business strategy review (it would be the re-re-review) that might lead to a re-appraisal of the firm’s in-play macro repositioning.

I know that’s highly unlikely, given his aversion to elements of the investment bank’s business, but while credit/macro trading accounted for 40% of Barclays’ investment bank net revenues in the first half, they were proportionally just half of the DB number at group level, at a more manageable 13%. More room for manoeuvre?

I don’t believe that on the basis of the latest numbers you can conclusively support the idea that’s been thrown around out there that European banks are pulling back FICC market share loss from their US counterparts, but the numbers do make you stop and wonder.

WHAT DID strike me in the Q2 numbers was that while FICC was still in decline at an industry level, equity trading revenues were pretty awful yet have escaped any real scrutiny. At a time when equity underwriting revenues were a bright spot – some firms reported record quarterly or first-half ECM revenues as IPO activity picked up – should the fact that equity trading volumes and net revenue performances were so poor at some shops be cause for any concern?

Forgive the data dump here, but check out the numbers: Citigroup FICC down 12%, equities down 26%; Bank of America Merrill Lynch FICC up 5% (thanks to mortgages and munis), equities down 14%; Goldman Sachs FICC down 10% (marred by a poor Q2 in currencies partially offset by better rates and munis), equities down 13%; Credit Suisse –10% FICC, –11% equities.

Even for those firms that didn’t see worse fixed-income than equities numbers, they were still relatively grim: JP Morgan’s –10% in equities bettered the –15% FICC performance. Barclays, macro was down 35% (due to lower vol in currencies and subdued activity in rates), credit fell 14% while equities “only” fell 10%. At UBS, the 14% reversal in equities outplayed the –20% showing in the comparatively much smaller FICC area (albeit Q2 did see higher revenues in currencies, rates and credit).

Deutsche Bank was balanced (–6% FICC, –5% in equities) while Morgan Stanley was the outlier, reporting a flat equities number against a 16% FICC decline (like Goldman, pulled down by currencies but offset by securitised and credit products).

It’s hard to put your finger on why revenues fell so sharply; most banks just boringly pointed to lower cash volumes. Is it strange that no-one seems to think this is an issue. I know I’ve been wondering about a lot of things here but could equity trading be the new FICC? Or is it just a reaction to the geo-political and other risk factors out there? I’m flagging it now and will be watching for signs.

Keith Mullin