For Wall Street's biggest banks, 2020 is shaping up to be a heyday for trading.
JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp. all saw double-digit spikes in trading revenues during the second quarter as financial markets around the world reacted to the continued fallout from the COVID-19 pandemic.
"Trading revenues benefit from uncertainty and high volatility," Stephen Biggar, director of financial institutions research at Argus Research, said in an interview. "A whole slate of asset classes went for a wild ride in the second quarter."
In the U.S. equity market, for instance, the Cboe Volatility Index, a widely used gauge of implied volatility based on the S&P 500, had an average daily closing value of 34.49 in the second quarter. That was the highest quarterly average since the first three months of 2009, according to Cboe Global Markets Inc. data.
At JPMorgan, trading helped push the largest U.S. bank's quarterly revenues to a record high even as net income fell year over year. Revenues for JPMorgan's market and securities services unit, the business line that includes fixed-income and equity trading, jumped to $11.33 billion in the second quarter versus $6.39 billion a year ago. Fixed-income trading was up 99% year over year, while equities rose 38%. Citigroup posted a nearly 50% revenue increase in its markets and securities services business, driven by a 68% surge in fixed-income trading. Equity trading revenues for Citigroup fell about 3% year over year. Bank of America, the third big U.S. bank more focused on deposits, saw sales and trading revenue climb 31.3% in the second quarter year over year. Fixed income, currencies and commodities trading revenues climbed 50% in that period, while equities revenues increased 7%.
Still, JPMorgan, Citigroup and Bank of America reported lower profits across their entire companies in the second quarter largely due to dramatic increases in both banks' provisions for loan losses.
Goldman, on the other hand, posted a slight year-over-year increase to its quarterly profits — thanks almost entirely to its traders and investment bankers. Net revenues for Goldman's global markets business jumped 93% to $7.18 billion in the second quarter versus $3.72 billion a year ago. Fixed-income, currencies and commodities trading revenues grew 149% in that same period to a nine-year high, while revenues for equities swelled 46% to their highest quarterly level in 11 years. Investment banking reached record quarterly net revenues in the second quarter as well, Goldman said in its July 15 earnings report.
"There's no question that over the last decade in a period of very low interest rates and low volatility that [trading] has been a more commoditized service," Goldman Chairman and CEO David Solomon said July 15 during an earnings call. "In a period where there's enormous change and enormous volatility in markets, we became super busy because our clients are super busy."
Morgan Stanley was the biggest standout, posting a 50.2% year-over-year spike in earnings applicable to common shareholders. Sales and trading revenues surged 68% from the prior year, with fixed income trading up 167.7% and equities higher by 23%.
The market's second-quarter swings made the first half of 2020 one of the most robust opportunities for big bank trading desks in recent years.
A steady climb in asset prices in the wake of the 2008 financial crisis, along with several reforms designed to limit risk-taking by the biggest Wall Street banks, made for a challenging environment in recent years for most of those companies' trading desks. Executives at the largest U.S. banks have worked since then to push their companies further into steadier revenue sources such as wealth management and consumer banking.
The boon to trading activity in the first half may be only a blip, however.
Even as the coronavirus rages on in certain parts of the U.S., financial markets began to stabilize late in the second quarter and have continued to steadily rise in the first few weeks of July. JPMorgan Chairman and CEO Jamie Dimon said that trading, as a result, is not going to be nearly as active in the coming quarters.
"You should assume it's going to fall in half," Dimon said of trading revenues on a July 14 conference call. "We don't assume we have these unbelievable trading results going forward. And hopefully, we'll do better than that, but we simply don't know."