Twenty-seven billion dollars is missing on Wall Street.
For more than a decade, the world's top investment banks practically minted money from the buying and selling of bonds, currencies and other complex securities. For many banks, the business became their lifeblood.
Now a combination of tough regulations, new technologies, calm markets and changing customer behavior has left that type of trading a shadow of its former self -- and much of Wall Street trying to redefine itself.
Five years ago, fixed-income trading -- so called because its keystone product, bonds, typically provides a fixed payout -- generated nearly $103 billion in income for the top 12 investment banks, according to Coalition, a London research firm.
By 2016, that had fallen to less than $76 billion -- down $27 billion from the peak.
The accelerating declines are likely to be on display over the next week as the biggest U.S. banks report their annual results, starting with JPMorgan Chase today. Some analysts predict that fixed-income revenue could fall another 20 percent this year. Some large banks, including Deutsche Bank, have already warned that the bond-trading bloodbath will get worse.
The trend is not only depriving giant investment banks of a staple income source but is also altering the pecking order and business practices of Wall Street in profound ways.
Nowhere is the shift more pronounced, or more painful, than at Goldman Sachs Group, not long ago regarded as the unrivaled king of Wall Street. These days, the bank is fighting to maintain an edge that has been blunted by the diminution of its core trading business.
At its peak, Goldman's fixed-income division churned out nearly $1 billion every two weeks. Last year, it took the bank an average of more than two months to earn that sum.
Until a few years ago, traders at big banks spent much of their time wagering on the future direction of markets. Sometimes those trades were executed on behalf of clients; often, they were done using the banks' own cash. Successful traders pocketed a percentage of their winnings, earning Hollywood-style glory in the financial media.
Trading jobs are much different now -- less risky, less glamorous and, most of all, less lucrative.
New government rules require banks to hold thicker capital cushions to guard against losses, which makes trading less profitable by tying up more of a firm's capital. Other regulations outlaw bank employees from trading with their companies' cash.
That leaves traders spending much of their time looking for efficient ways to connect buyers with sellers.
"These banks are basically utilities now," said Harley Bassman, who retired last year as a portfolio manager at the giant bond fund manager Pimco.
Even when it comes to serving clients, traditional investment banks are finding themselves at a disadvantage to upstarts that move faster at a lower price.
Jane Street is one such firm. Founded in 2000, it originally served as a behind-the-scenes broker, helping big banks make complex trades with one another, out of view of the investors and money managers who were the banks' customers. These days, though, Jane Street offers the same services as the banks but with more power to automate trades.
Business on 01/12/2018