Boom times for bank trading have gone, and may never come back Reuters Mon, May 12, 2014, 12:24pm EDT By Jamie McGeever LONDON (Reuters) - The boom years of financial market trading, when banks made unprecedented profits from bonds, currencies and commodities, may be over for good as financial firms realise there will be no cyclical upswing on their dealing desks.Even though it's taken Western economies several years to regain pre-crisis national output levels, many doubt banks will ever revisit the pre-crisis high watermark of their trading activities. Revenues from fixed income, currencies and commodities - the so-called 'FICC' universe - continued to tumble for most major U.S. and European banks during the first quarter of 2014, increasing the pressure on them to rethink business models. As new regulation bites and extraordinary monetary and economic policies smother extreme market swings, the trading volumes and price volatility that middlemen banking traders thrive off has ebbed. And it looks like a structural shift rather than a cyclical or temporary lull. "The revenues have gone. The world has changed from 2007, 2008," said Grant Peterkin, head of absolute bond returns at Lombard Odier in Geneva. "The regulatory aspect is the biggest aspect." Regulation after the 2007-08 crisis such as 'Dodd-Frank' and 'Volcker Rule' legislation in the United States and Basel III banking reforms globally, effectively restrict banks' ability to hold, trade and speculate on fixed income and derivatives. This reduces liquidity, but other traditional liquidity providers like hedge funds have been unable to fill the gap because their businesses are also under pressure. British bank Barclays grabbed the headlines, posting a 41 percent plunge in trading revenue compared with the same period in 2013, then announcing 7,000 of its 26,000 investment banking jobs will be cut. "Some of the pressures we saw on the business towards the end of last year are clearly structural as well as cyclical," Barclays Chief Executive Antony Jenkins told CNBC on Thursday. Other bank chief executives are likely to follow Jenkins in terms of direction if not magnitude, and reduce the size of their FICC trading desk operations, analysts say. They are expected to continue cutting costs, trimming headcount, and in some cases, exit particular markets. "We've had the most enormous change," said Chris Wheeler, banking analyst at Mediobanca in London. "And there's more to come as the full impact of tapering is felt."" http://finance.yahoo.com/news/boom-times-bank-trading-gone-110059805.html Volatility down, Volume down=Traders out of a job.
Regulation kills jobs. Why should it be any different with trading then it is with healthcare or manufacturing? This country got exactly what it asked for.
Why would decreased liquidity result in these instruments trading in narrower ranges? It would seem that a thin market would make it more likely for price to continue to run once a trend began -- intraday or longer term. Wasn't it accepted wisdom that specialists -- in the day -- contributed to orderly markets and that locals in Chi and NY capped the runs as they more often than not bet on reversion to the mean?
Volatility ebbs and flows. Central Bankers are suppressing volatility. When it returns, golden days are back again.
Well, there is plenty of liquidity, it's just all coming from the Fed that is the real issue. The liquidity they are referring to is customer flow. If you can't trade off of customer flow then you lose that edge. So it's basically a one sided market.
Trends are not the same thing as volatility. Higher vol allows people to synthetically de-leverage vs lower vol trend moves which forces people to increase leverage. There is a HUGE difference.
I wonder if the banks benefited mainly from costs declining faster than commissions and inflation declining faster than interest rates, otherwise known as Gibson's paradox. When those trends were played out, the fun was over. Even while it lasted, trading was never very profitable. Break out things like m&a, asset management, private client, etc and I bet the pure broker dealer at places like GS and MS never earned much more than a 15% ROE, even in the good years.
Funny - I'm seeing a big drop in savvy liquidity consuming participants in ES and a few other markets. From my perspective, opportunities are opening up left and right. I guess the banks' loss is my gain.