Wall Street banks’ equities-trading units aren’t getting much relief from the strongest stock rally since 2009, as sinking volume and already thin margins threaten to make their annual performance the worst in six years.
Third-quarter equities-trading revenue probably fell 14 percent from the same period in 2011, the fifth straight drop of more than 8 percent, according to estimates by Kian Abouhossein, a JPMorgan Chase & Co. analyst. Full-year revenue at the five largest U.S. investment banks may be the lowest since 2006, UBS AG’s Brennan Hawken wrote in a Sept. 19 note to clients.
Equities trading, which generated $40 billion for the nine largest global investment banks last year, has been an attractive business because capital requirements aren’t as strict as those threatening fixed-income returns. Lower volumes have damped that optimism as investors remain skeptical about the global economy, which may lead to job cuts.
“It’s already a business that was being run on quite thin margins,” said Richard Staite, an analyst at Atlantic Equities LLP in London. “Now you need to see more banks dropping out. The marginal players will have to or are already looking at these business lines and whether there is any justification for remaining in them.”
Royal Bank of Scotland Group Plc said in January it was exiting cash equities, the trading of common shares on public exchanges, and failed to find a buyer for the unit. Citigroup Inc. and London-based Barclays Plc, which have the smallest market shares among the nine investment banks, lost ground over the 12 months ended June 30, while Goldman Sachs Group Inc. and New York-based Morgan Stanley, the biggest, gained.
Equities, which account for about a quarter of total trading and investment-banking revenue, includes commissions and gains from buying and selling stocks, futures, options and other equity derivatives, as well as fees and interest income from providing services and lending to hedge funds.
The estimated drop in third-quarter equities-trading revenue came even as the Standard & Poor’s 500 Index rose 5.8 percent in the three months and the Stoxx Europe 600 Index climbed 6.9 percent. The S&P 500 is up 15 percent so far this year, which would be the biggest annual increase since 2009.
The rally isn’t enough to stem the decline in volume. Average daily volume for U.S. equities was 6 billion shares in the third quarter, the lowest since at least 2008 and about half the 10.9 billion average in the first quarter of 2009. The figure has dropped year-on-year for 12 of the past 13 quarters. Volume on the London Stock Exchange fell 11 percent from the second quarter and is up 2.6 percent from a year earlier, according to data compiled by Bloomberg.