Outflows from equity mutual funds and lower volatility have helped depress volumes. Money has exited U.S. equity funds in 2012, the sixth consecutive year of outflows, Richard Ramsden, a Goldman Sachs analyst, wrote in a report last month. The Chicago Board Options Exchange Volatility Index, or VIX, has averaged 18.13 so far this year, down from 22.09 for the same period in 2011 and 23.65 in 2010.
Banks’ revenue also is reduced by the continued move to electronic trading, which accounts for as much as 70 percent of transactions on the Nasdaq Stock Market and generates lower margins than voice orders. Institutions pay an average of 2.05 cents per share for orders that require handling compared with 1.08 cents for those entered through algorithms, according to Tabb Group LLC.
The drop in volume and margins isn’t hurting all financial firms. Asset managers including BlackRock Inc. and Vanguard Group Inc. benefit from paying lower spreads and stand to gain from the third-quarter rally. BlackRock, the world’s largest asset manager, gets more than half its base fees from equity products and is expected to post its highest adjusted earnings per share since 2010 when it reports third-quarter results this month, according to the average estimate of 19 analysts surveyed by Bloomberg.
Even firms with the most market share are hurting. Goldman Sachs’s third-quarter equities-trading revenue may have fallen 23 percent from a year earlier to $1.8 billion, estimated Chris Kotowski, an Oppenheimer & Co. analyst in New York. Revenue at Morgan Stanley may have dropped 11 percent to $1.2 billion, according to Credit Suisse Group AG’s Howard Chen.
Spokesmen for Goldman Sachs, Morgan Stanley, Citigroup and UBS declined to comment. The companies will report third-quarter results later this month.
Banks are suffering from equities markets driven largely by macroeconomic and political events, such as Europe’s debt crisis, said Keith Davis, an analyst at Farr, Miller & Washington LLC, which manages about $800 million.
“It’s going to be a continued environment of risk-aversion and really quick trigger fingers on the part of portfolio managers to protect gains,” said Davis, who is based in Washington. “It will be quite some time before there are money flows into hedge funds and you have aggressive money going after aggressive returns like the old days.”
Banks including Zurich-based UBS and Morgan Stanley have cut their fixed-income trading units as new rules force them to hold more capital against complex securities. Equity products haven’t faced the same increases, as most trade on exchanges.
Equities trading “has been overlooked for some of the deeper cuts given the attractive capital-light profile,” consulting firm Oliver Wyman and Morgan Stanley analysts wrote in a March report. “As a result, the economics of these businesses are likely to continue to be under pressure as banks fight tooth and nail for market share.”