ALMOST EXACTLY A year ago, I wrote a piece entitled “FICC: Not dead yet” in response to all those people who were telling me the fixed income, currencies and commodities trading business was dead and buried. I never bought the story – and even a year back was terminally bored of the cyclical vs seminal debate. Be warned that I will zone out completely if it’s brought up in conversation – which is still is, alas, far too frequently.
And that’s not just because it was always a ridiculous discussion since no-one had the remotest idea if it was one or the other. It was also because the notion of what constitutes “seminal” tends to morph as the business, market and regulatory cycles rotate. Cyclical seminality, seminal cyclicality … you say tomato, I say tomato.
How quickly did the bond trading naysayers shut up when we had that bout of volatility a few weeks ago and volumes started to perk up? I was chatting to someone in the pro-FICC camp this week who spoke of “bone-jolting volatility” in sovereign debt as markets reacted to the prospect of a post-stimulus world in the US. Relative values have shifted up and down in recent weeks and we’ve seen some large-scale portfolio rotation that will almost certainly get the fast-money guys’ blood pumping.
My position, incidentally, had been that flat-lining trading volumes, volatility and velocity were the result of a combination of early-stage regulatory transformation uncertainty, related industry restructuring, and massive central bank liquidity during a period of at-best uncertain economic growth. As such, I reckoned, it was a temporary set of circumstances that would evolve over time as the underlying market scenario changed and banks got through their restructuring and business realignment plans.
Flow will rotate – slowly – to those who remain committed to the business
GRANTED, WE AREN’T going back any time soon to those shady gun-slinging pre-financial crisis days of massive leverage, massive FICC revenues, massive profits, massive egos, unbridled risk-taking, nose-bleed complex derivative structured product-peddling, dumb-ass securitisation and chest-beating bravado (note I don’t say never). But we will get back to a steady state.
If you can envisage a market freed from the vice-like grip of central bank-inspired price and liquidity distortion and assume that the bulk of FICC trading will be axed – as my pro-FICC counterpart told me – around client FX hedging, hedge funds and large pools of capital opportunistically expressing market views, and money managers executing large blocks of securities, there is still a business worth maintaining if you can garner good flow. And flow will rotate – slowly – to those who remain committed to the business and who will benefit from an eventual reduction in dealer bandwidth and capacity.
I’d been thinking about my contrarian piece as the third-quarter bank results started to come out and got to wondering whether the tide was starting to turn so that I might finally claim victory over the naysayers. For evidence, forget the nine-month FICC numbers because of the embedded lag effect. Noting that I have always cautioned against setting too much store on a single quarter, I do wonder nonetheless if we’re reaching that turning point and what the year-on-year quarterly numbers tell us.
SO WHAT DO they tell us? Well, Credit Suisse said fixed-income sales and trading revenues were up 50% over an albeit subdued quarter a year earlier driven, it said, by “higher client activity resulting in significant gains across most products” – securitised products, EM and even global macro, in particular foreign exchange.
If Barclays’ macro income fell 27% on a 9M basis because of what it said was subdued client activity in rates and lower H1 FX volatility, on a 3Q y-on-y comparison macro rose 3% thanks to higher FX volatility (brought down, though, by moribund client activity in rates). Deutsche Bank’s debt sales and trading number was up 15%; the bank citing significantly higher revenues in RMBS, an improved FX market environment and increased client activity, Like Barclays, DB’s rates revenues were significantly lower although the bank put this down to FVA losses due to market movements and a calculation refinement. Flow credit revenues were also significantly lower due to lower client activity.
Goldman Sachs reported a 74% increase in its FICC line in Institutional Client Services owing to significantly higher net revenues in currencies, commodities, interest-rate products and mortgages (partially offset by significantly lower net revenues in credit products) amid more favourable market-making conditions towards the end of the quarter. At BofA Merrill, FICC sales and trading revenue rose 11% driven by strong results in currencies due to increased volatility, and gains in mortgages and commodities.
Morgan Stanley’s FICC sales and trading net revenue in the quarter was up 26% reflecting higher revenues in FX and securitised products, offset by lower results in commodities and credit products. At Citigroup, fixed-income markets rose 5% reflecting strength in securitised products and a better showing in rates and currencies. JP Morgan’s fixed-income markets revenues rose 2% on the back of a particularly strong performance in FX and EM.
So am I sticking my neck out by articulating a FICC turning point based on one quarter’s data? Almost certainly as the numbers are certainly mixed in certain FICC segments. But like many people I foresee a more volatile 2015. And I reckon banks that’ve said they’re cutting back bits of FICC will decelerate or even halt the pullback if market conditions change.
And if I’m wrong, I can least claim credit for being consistent.
