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Fixed income trading divisions at major Wall Street banks posted weak third-quarter results, with their performance being overtaken by equity trading divisions.
The equity businesses of the five largest U.S. banks are on track to generate more than $66 billion in revenue over the first nine months of this year, roughly $3 billion more than the expected revenue from their bond, foreign exchange, and commodities businesses. Part of the growth was driven by prime brokerage operations serving hedge funds and other large equity investors.
This means many bond traders will, for the first time, face a full-year performance that is surpassed by their equity trading counterparts. This will not only change the ranking of status among Wall Street trading divisions and the allocation of bonuses, but also challenge the long-held view that computers will gradually take over equity trading, eroding commissions and revenue.
Goldman Sachs CEO David Solomon told analysts: "Not long ago people were worried about electronification and equity trading. But today, looking at our equities revenue and the adjustments we have made, the opportunities we face are greater than anyone could have previously imagined."
The first nine months of data are based on results reported Tuesday by Goldman Sachs, Citigroup, and JPMorgan Chase, as well as analyst forecasts for the other two large banks scheduled to report on Wednesday.
So far this year, Goldman Sachs equity traders have posted two quarters that rank among the bank's best-ever quarterly performances. JPMorgan Chase equity traders also recorded their best third quarter in history, surging 49% year over year.
Meanwhile, fixed income trading divisions are being hit by rising interest rates. The Federal Reserve raised its benchmark rate in September to curb inflation, and earlier this month the 10-year U.S. Treasury yield approached its highest level in nearly a quarter of a century.
Within fixed income businesses, revenue from rates and spreads products weakened, while foreign exchange and commodities businesses showed greater resilience.
Among the large banks that reported results on Tuesday, only Citigroup's fixed income division saw revenue not decline. The bank's profit was also boosted by a standout quarterly performance in its services business.
After major U.S. banks began reporting quarterly results on Tuesday, most bank stocks fell. Banks including Bank of America and Morgan Stanley are set to report quarterly results on Wednesday.
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