Yesterday at the Deutsche Bank Global Financial Services Conference the biggest blockbuster announcement came from Citigroup which, following in JPM's footsteps, announced that trading revenue could slide by 20%-25% [5]. As such, this would mean that just like JPM, more of the big banks are setting up for the worst trading start in the first half of the year since the financial crisis. However, a far more important announcement came during the Keystone Presentation by JPM's CEO of its Investment Bank, Daniel Pinto, who explained the reason behind this TBTF trading revenue slowdown, which also happens to be the explanation why the bulk of the hedge fund community is not profitable so far in 2014.
According to Pinto, a pair of wrong-way bets made by clients at the start of the year is partly to blame for Wall Street’s trading slowdown. Namely: the two mega-pain trades so far in 2014: being long USDJPY and short Treasurys which everyone had put on with mega-conviction at the beginning of the year, have so far in 2014 generated mega-losses for all those involved.
Bloomberg quotes Pinto [6]who said succinctly summarized that "Neither of those trades paid." He added: "Essentially you start the year with the wrong momentum, where you lose money at the very beginning, and you ended up with probably a lower risk appetite than you would have otherwise." And, as a result of actually, gasp, losing money, "Clients appear to be hesitating in placing the larger hedges that typically happen earlier in the year."
Imagine that: trading in size only when guaranteed profits in "right momentum" trades. So what happens to volume when the Fed fully walks away - one block of spoos moves the market by 1%?
More from Pinto: "You have episodic trades, big hedges, big corporate trades, that happen along the year,” Pinto said. “Particularly in the first and part of the second, the amount of those trades, even though the pipeline is very healthy, they haven’t happened. It looks like they are going to happen later in the year, and that is a big swing factor."
There was a third, and just as ironic, culprit: in its attempt to restore confidence, the Fed, both directly via its trading desk, and indirectly, has pushed volatility to near historic lows as covered here previously. So much so in fact, that nobody is making any money from daytrading anymore! Pinto added that when "the market doesn’t move, it’s really difficult to monetize your flows,” Pinto said. “It makes the market more competitive and margins really tighten because it costs you very little to provide liquidity, so you provide a lot.”
Well isn't it ironic, again, then that it is the Fed's explicit intervention and micromanagement of the market that has crippled banks? Sadly for JPM, considering that the Fed will likely not do much to boost vol on its own, and certainly not for the duration of Bernanke's lifetime if the former chairman is correct, one probably shouldn't expect much of a pickup in bank trading revenues any time during the next decade.
The full Pinto statement can be heard 10 minutes into the recording of his fireside chat below:
[7]