JP Morgan set for equity derivatives gains

IFR 2340 - 04 Jul 2020 - 10 Jul 2020
4 min read
Christopher Whittall

JP Morgan is set to report another impressive quarter in equity derivatives, following through on substantial gains it made earlier this year in its stock-trading division.

The US’s largest bank made nearly US$2bn in the first half of the year in equity derivatives, according to sources familiar with the matter, a group of activities that includes trading stock options, selling equity-linked investment products and lending against portfolios of shares.

JP Morgan's equity trading volumes were three times higher in the second quarter than the same period in 2019, one source said.

Equity flow trading – a team overseen by head of global volatility Rachid Alaoui in New York – has been pivotal to this year's gains, as JP Morgan’s traders have managed to reap hefty profits amid some sizeable swings in stock markets.

The bank has made more than US$500m in equity flow trading in the first half of the year, with at least half of that coming in the second quarter, sources say – already surpassing its 2019 revenue haul several times over in this area. Trading convertible bonds has been another bright spot following a rush of new issuance.

A spokesman for JP Morgan declined to comment. The bank is scheduled to report earnings on July 14.

The equity gains come in what is expected to be another strong quarter for JP Morgan's trading division. Daniel Pinto, head of the corporate and investment bank, said in late May that trading revenues in its markets division were on track to rise 50% annually in the second quarter led by fixed income as well as a “very solid performance in equity”.

Equities accounted for 31% of JP Morgan’s US$7.2bn in first-quarter markets revenues.


Equity derivatives have helped propel US banks’ stock-trading units forward this year amid a surge in trading volumes following the novel coronavirus-induced market slump and subsequent rally.

Citigroup and Goldman Sachs joined JP Morgan in citing derivatives as an important driver in significant revenue gains in equities trading in the first quarter.

That contrasts with the difficulties at some large European banks with equity derivatives units that are more heavily geared towards complex investment products, which proved costly to manage during the March turmoil. BNP Paribas and Societe Generale, two of the most prominent banks in these activities, both reported heavy write-downs on structured products in the first quarter.

JP Morgan had the largest market share in equity derivatives of the top 12 investment banks at the end of 2018, according to the most recent available rankings from analytics firm Coalition. But industry executives say the US bank had sometimes punched below its weight in equity flow trading – an area that can be hugely profitable when markets are choppy.

It is particularly significant then that much of JP Morgan’s revenue gains this year have come from flow trading. The team Alaoui oversees had made almost twice as much money in equity flow derivatives as their peers in the second quarter up until the end of May, according to one source.

That strong showing came despite a rallying market that led to a drop in equity volatility, which typically provides the fuel for large gains for bank trading desks.

The Vix, CBOE’s Volatility Index, often referred to as Wall Street’s fear gauge, declined from 54 points to 30 points over the course of the second quarter. That is roughly double 2019’s average of 15 points, but still far below the peak close of 83 points in mid-March.

Additional reporting by Owen Wild