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Bountiful 2017 Left Wall Street Traders in Cold -- WSJ

30 Dec 2017 7:32 am
By Liz Hoffman 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (December 30, 2017).

Markets boomed in 2017, but Wall Street didn't share in the bounty.

At big banks, a quiet December closes what turned out to be an unremarkable year for trading, a lifeblood of large firms. Lower revenues likely mean slim bonuses for many traders and, in some cases, further cuts to the business, executives and consultants say.

The bleak end was in sharp contrast to the way 2017 started -- with a bang. The 2016 U.S. presidential election, a long-awaited rise in interest rates, and contested elections across Europe jolted markets alive early in the year.

Stock markets continued to rise throughout the year -- the Dow Jones Industrial Average closed at a new high 71 times. But stocks, bonds, currencies and other assets traded in such a calm manner that it reduced demand for skilled traders and made it harder for them to eke out profits.

Executives at JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. in recent weeks predicted their fourth-quarter trading revenues would fall by about 15% from a year earlier. That would imply full-year declines of between 5% and 10% for the three firms, whose trading revenues totaled $50 billion in 2016, about one-fifth of their firmwide revenue.

At the 10 largest global banks, trading revenue was down 5% through the first nine months of the year. Revenue fell 2% in stock trading and 7% in fixed income, a larger business that includes corporate and government debt, currencies, commodities, products linked to interest rates and other bespoke instruments.

"No one is immune," said Devin Ryan, an analyst at JMP Securities, an investment bank. "The backdrop has been really challenging."

It is the latest ignominy for Wall Street traders who have seen their ranks, compensation and clout dwindle since the financial crisis. New regulations have curbed risk-taking, while electronic trading has moved into once-opaque corners of the market ruled by brokers, bringing transparency to prices and slashing profits.

Meanwhile, investor dollars continue to flow into passive index funds, which trade in smaller amounts and negotiate hard on fees.

"Anybody who's realistic knows this is a different world than it was eight or 10 years ago," said Alan Johnson, a consultant who advises banks on their compensation. "It's time to stop waiting for sales and trading to come back."

The average trader's compensation will likely fall 7% when bonuses are doled out in January, according to the Options Group, a Wall Street headhunter. The cuts are likely to be deepest in areas like stock trading, where machines now do the work of thousands of telephone-armed brokers, and will largely spare those who can code.

A year ago, hopes were high. The U.K. vote to leave the European Union had sparked trading in the British pound and European interest rates and government debt. Trading surged again on the back of Donald Trump's surprise victory. Trading revenue at the five biggest U.S. banks rose 4% in 2016.

Banks hustled to staff their trading desks for what many believed was a revival in Wall Street's fortunes. Early in 2017, London trading desks offered raises of up to 30% to poach interest-rate experts from rivals, according to Jessica Lee of Options Group.

But 2017 offered fewer of those macroeconomic shocks. "There haven't been that many catalysts. It hasn't been that exciting," JPMorgan CFO Marianne Lake said earlier this month.

Nothing seemed to jolt markets from their slumber. Investors shrugged at one jarring headline after another, from escalating nuclear tensions with North Korea to the widening probe into the White House's connections to Russia.

Trading activity in U.S. Treasurys between Dec. 1 and Dec. 22 was 8% lower than a year ago, according to JMP Securities, despite an interest-rate increase from the Federal Reserve on Dec. 13.

One measure of stock-market volatility, known as the VIX, hit new lows in December. Meanwhile, trading volume on key U.S. stock exchanges is down 11% this quarter compared with a year ago, according to JMP.

Corporate-bond trading volumes are up from a year earlier, but the gap narrowed between the asking and offered prices. That leaves less potential profit for a bank as middleman.

This month, Jefferies LLC, a smaller broker-dealer whose fiscal year ends Nov. 30, reported a 37% decline in fixed-income revenue that more than washed out a 10% rise in equities trading revenue. Overall trading revenue fell 11%, versus a 27% rise in investment banking, which includes fees from underwriting and merger advisory.

Investment banking, the province of well-heeled boardroom bankers, thrived in 2017. The market for initial public offerings heated up after a slow 2016. Companies also took advantage of low interest rates to issue bonds, and the merger boom rolled on.

Options Group estimates investment bankers' pay will rise 10% this year, teeing up compensation tugs-of-war within banks and providing fresh tinder for the rivalry between Wall Street's two tribal factions.

Also a winner, said Mr. Johnson, the compensation consultant, are the more mundane businesses of asset management and private banking. These businesses require little capital and throw off smaller, but steadier profits than trading and investment banking. Shareholders prize them for this stability.

"Wall Street has moved on," he said.

Write to Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

December 30, 2017 02:32 ET (07:32 GMT)

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