IN AN open-plan office big enough to house a football field, scores of traders peer into the unearthly glow of trading terminals stacked two or three high and dozens in a row, buying and selling bonds and currencies. Flags poke out above the terminals, to denote which country’s financial instruments are changing hands. It is an awkward reminder of the former docks outside the windows, which bear names such as Canada Wharf or West India Quay, after the places from which they used to welcome ships.
Just as London’s docks—once the world’s busiest—emptied when the tides of trade lapped new shores, the dealing rooms of the world’s biggest international financial market are being hollowed out. The buying and selling of bonds (“fixed income” in the argot), currencies and commodities have been the main source of profits for investment banks in recent years. Now FICC, as these activities are known collectively, is in retreat.
In 2009 the world’s big investment banks earned nearly $142 billion from FICC—63% of their total revenue, according to Coalition, a data firm. By last year that had halved to nearly $74 billion, accounting for slightly less than half of revenue (see chart). In 2013 alone revenues from FICC fell by almost 20%. And the precipitous descent is continuing. On April 11th JPMorgan Chase, the world’s largest investment bank by revenue, posted a 21% fall in income from FICC in the first three months of 2014 compared with a year earlier. Days later Citigroup, another large American bank, announced an 18% decline.
The latest drops are all the more surprising since the first quarter of the year tends to be particularly profitable for banks. Moreover, the quarter ought to have been especially lucrative this year given the brisk pace of corporate-bond issuance as creditworthy companies tried to lock in low borrowing rates. The disappointing numbers are rekindling an argument within the industry over whether FICC’s decline is merely cyclical or the start of a long-term slump in the profitability of banks’ trading businesses.
The trend towards falling trading revenues is a global one, afflicting New York and Hong Kong too. But it is being felt most acutely in London, which is home to the bulk of European investment banking. Analysts expect Europe’s big banks to report even sharper drops in trading income than their American rivals. Huw van Steenis, an analyst at Morgan Stanley, reckons Europe’s leading investment banks gave up about five percentage points of market share in FICC to the three leading American banks last year. They may lose another three points this year.
At least some of the forces at work are cyclical. Central banks’ strenuous efforts to keep long-term interest rates low are depressing bond trading. There is little reason to buy or sell bonds if the interest rates that determine their price are low and stable. Trading volumes may pick up again as central banks slow and eventually halt their bond-buying, particularly if the retreat from “quantitative easing” leads to jumps in interest rates. (Such a jump could at first inflict losses on banks as the bonds they own fall in price.)
Yet deeper trends also appear to be at work. The most important is the growing weight of regulation. Banks everywhere are now required to hold more capital to underpin their trading. The Swiss rules are especially demanding, to the detriment of the two biggest Swiss banks, Credit Suisse and UBS. Many countries are restricting banks’ trading on their own account, instead of on behalf of clients; America has banned it outright. There is also a global push to shift derivative-trading to central clearing houses.
Estimates vary as to how much of the sting of these regulations is yet to be felt. Analysts at Citigroup, for instance, reckon that about two-thirds of the impact has already been absorbed, leaving revenues to decline by another 6-7%. Others predict that they still have twice as far to fall. It is probably safe to side with the pessimists. This is partly because bankers and analysts tend to underestimate the harm that regulation will inflict on revenues. But it is also because regulators are likely to push the trading of more instruments onto exchanges, where margins are narrower, as a result of market-rigging scandals affecting currency trading and interest rates.
The tides of finance have almost certainly turned. The real questions are how far they will retreat and how quickly the industry can adapt.
This article appeared in the Finance & economics section of the print edition under the headline "FICC and thin"
