NEW YORK: Wall Street may finally be getting the joke about trading. Citigroup, JPMorgan and other banks estimate that second-quarter revenue in fixed-income, currency and commodities will drop again by perhaps a fifth. Shareholders reckon it's a long-term slump.
Brokerage executives may publicly claim otherwise, but a recent move by Credit Suisse acknowledges that the business is fading. The Swiss bank has set up Wake Securities, a joint venture with high-frequency trading firm Tower Research, to outsource some transactions in US Treasuries and interest-rate swaps.
Tower's systems provide the market-making; Credit Suisse keeps its client relationships. The bank is now considering selling a stake in the venture, according to the Financial Times, which may help cut costs and reduce its need for capital.
The latter is especially important after the bank paid a $2.8 billion fine last month to settle US charges of aiding tax evasion.
Credit Suisse and its rivals have been refashioning their FICC desks since the financial crisis - from slashing assets to closing parts of the business. These moves were driven by unprofitability, new regulations or both.
Those factors are at work here, but there's more to it. Credit Suisse is offloading two of the most liquid markets and, in interest-rate swaps, one of the most lucrative per trade.
Tower's algorithms should find more liquidity and better prices for its partner's customers. If banks are already falling behind in those products, though, they may be even more vulnerable in less liquid markets like corporate bonds.
Much remains unclear about Wake, including how it is financed and whether there is any recourse to Credit Suisse in the event of a crisis. Investors won't soon forget that Citi and HSBC were forced to cover losses on structured investment vehicles in 2007.
What's becoming obvious, though, is that the slump in trading profit over the past few years may be more secular than cyclical.
The likes of Goldman Sachs No. 2 Gary Cohn may deny it, but it's clear to almost 60 percent of US bank shareholders, according to a straw poll by Citi analysts.
Credit Suisse's move shows financial firms' owners may be the ones with their finger on the pulse.
CONTEXT NEWS: Credit Suisse is considering selling a stake in its fixed-income joint venture, Wake USA, according to the Financial Times.
The bank set up the unit in recent months and is using it to trade some of its US Treasury bonds and interest-rate swaps. Its partner is Tower
Research, a high-frequency trading firm run by Mark Gorton, who used to work on the proprietary trading desk at Credit Suisse in the 1990s.
Tower and Credit Suisse jointly own a holding company that owns 75 percent of Wake USA. The rest is owned by Wake employees who previously worked at Credit Suisse. Tower is the market-maker, while Credit Suisse retains all client data.
Over the past few weeks, several bank executives have told shareholders that second-quarter revenue in their fixed income, currency and commodities businesses is falling.
JPMorgan had tracked a roughly 20 percent drop by early May compared with the previous year, according to a regulatory filing.
When pitching its capital increase call on May 19, Deutsche Bank revealed fixed-income revenue was some 10 percent lower than last year's second quarter.
Citigroup finance chief John Gerspach told investors at a conference on May 27 that equities and trading revenue may be down by 20 percent to 25 percent.
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