Goldman's Trading Desk Had Its Worst Year Since 2004: Here's Why

We already knew it was an ugly quarter for Goldman's trading desk. This morning, when Goldman issued its 2017 10-K we got an indication just how ugly it really was, and more importantly why.

According to the world's biggest incubator of central bankers, in 2017 Goldman had just 4 days in which it generated profits of more than $100 million. According to Bloomberg data, this was the lowest number of sessions since at least 2004. This is shown in the chart below which presents the frequency distribution of Goldman's daily net revenues for positions included in VaR for 2017.

It also marks a remarkable fall from grace for a bank which milked the crisis for all it was worth to make a killing: for example, in 2009 Goldman traders made over $100 million on 131 days; even during the depths of the crisis, in 2008, Goldman managed to make more than $100 million per day on at least 10 days.

Meanwhile, on the other end, the bank suffered 31 days of losses in 2017, the most in two years.

While we already knew that Goldman’s fixed-income trading group struggled last year as the commodities unit turned in its worst performance since the firm went public and persistently low volatility kept clients on the sidelines, the data suggest that weakness was persistent across all verticals. Competitors also have eaten into the bank’s business, leading it to add language in its filing to show that "prices as reflected in bid/offer spreads are under threat", according to Bloomberg, to wit:

"Price competition has also led to compression in the difference between the price at which a market participant is willing to sell an instrument and the price at which another market participant is willing to buy it (i.e., bid/offer spread), which has affected our market-making businesses. In addition, we believe that we will continue to experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by further reducing prices, and as we enter into or expand our presence in markets that may rely more heavily on electronic trading and execution.

We also compete on the basis of the types of financial products that we and our competitors offer. In some circumstances, our competitors may offer financial products that we do not offer and our clients may prefer."

Finally, for those curious why the mighty have fallen so hard, the answer can be found in Goldman's VaR, which as Goldman reveals has plunged in recent years, with Goldman's average daily VaR decreasing to $54 million in 2017 from $63 million in 2016, as a result of a drop across all categories - rates, equities, currencies, and commodities - "due to reductions across all risk categories, partially offset by a decrease in the diversification effect."

The real culprit, however, central banks and buybacks as "the overall decrease was primarily due to lower levels of volatility."

And with Goldman predicting a 23% increase in buybacks this year to a record $650 billion, which would suggest a further drop in VIX - and thus Goldman's VaR - one can understand why Goldman is increasingly shifting its strategic focus to its consumer-focused lending and depositor platform, Marcus, i.e. old-school banking, which in a world where trading is no longer as profitable as it once was, is the Plan B alternative for Lloyd Blankfein.


lookslikecraptome JibjeResearch Mon, 02/26/2018 - 10:59 Permalink

They will abuse the cryptos, all of them, like a 2 dollar crack whore. These guys, and others like them, move the SP any where they want. Look at the resources the big players have. Buffett himself has 100 billion in cash laying around. That is 25% of BTC market cap. BTC is only there cause the big players are ok with it for now. Cryptos are indexes and they are NO different than what has happened in the financial world b4. I do not hate BTC. They will never change the world like the crypto faithful believe. 

In reply to by JibjeResearch

buzzsaw99 Mon, 02/26/2018 - 10:29 Permalink

the muppets be like when we make a move the squid front runs us every time and we losing all our damn money and now can't afford the g.i. joe with the kung fu grip.  better to just buy and hold or at least find someone who will execute trades cheaper since they're going to give us crap fills anyway.

Harry Lightning Mon, 02/26/2018 - 10:32 Permalink

Its amazing this company makes any revenue in its trading operations, considering its fixed income securities pricing to customers is far from competitive with the rest of the dealers. Maybe if you're a Goldman client, you get special treatment in other areas of the company if you allow them to quote you bigger bid offer spreads than anyone else, I don't know. But what I do know is that it was my experience to find that their price offerings in most fixed income areas was rarely among the top three prices in most fixed income security classes, and hence I did very little business with them. Interestingly, two of the firms who had the most competitive pricing - Lehman and Bear - both went tits up in the financial crisis. Was it because they were too price competitive, or were the other dealers just trying to get these two out of the way ?

Harry Lightning lookslikecraptome Mon, 02/26/2018 - 14:59 Permalink

Perhaps so, but that is a very crowded field and not an easy place to make money, GS has never been known for any dominance in the electronic arb field of stocks. Maybe that's where their trading profits come from. 

All I'm saying is echoing what that ex-Goldman trader wrote in a famous op-ed several years ago, to wit this firm has little concern for its clients and the pricing I have seen from it over many years bears that out. If they are that far away from the market in a non-exchange traded instrument, how do they make any money from customers on the more transparent exchange-traded instruments ? I never could figure that out, and always thought that their customers were receiving some other type of value in the relationship to offset the terrible pricing they receive from the GS trading desks. Either that or the GS clients are imbeciles, which could be although you would think that sooner or later someone from another firm would be able to wake them from their slumber.

In reply to by lookslikecraptome

tropicthunder Mon, 02/26/2018 - 10:40 Permalink

Guess nigga slamming' the CRIMEX GOLD CONTRACT during the least liquid hours isn't quite paying' da bills anymore.

Good riddance on all you Joo bankster motherfuckers...

There Mon, 02/26/2018 - 11:06 Permalink

Now that Government Sachs is actually Government Sachs thanks to President'll Sign Anything, they will run the printing presses.