JPMorgan Chase & Co., the world’s biggest investment bank by revenue, said a pair of wrong-way bets made by clients at the start of the year is partly to blame for Wall Street’s trading slowdown.
Some of the biggest wagers included shorting Japan’s currency and betting that U.S. interest rates would rise more steeply than those in Europe, according to Daniel Pinto, head of the New York-based firm’s corporate and investment bank.
“Neither of those trades paid,” Pinto, 51, said today at an investor conference in New York. “Essentially you start the year with the wrong momentum, where you lose money at the very beginning, and you ended up with probably a lower risk appetite than you would have otherwise.”
JPMorgan warned investors earlier this month that second-quarter markets revenue will probably drop about 20 percent from a year earlier, after a 21 percent tumble in fixed-income, currencies and commodities trading in the first quarter. That would amount to JPMorgan’s worst first half for trading since the financial crisis.
Another reason for the lackluster results is reduced volatility, which has dropped to the lowest in 10 to 15 years for rates, currencies and credit trading, Pinto said.
When “the market doesn’t move, it’s really difficult to monetize your flows,” Pinto said. “It makes the market more competitive and margins really tighten because it costs you very little to provide liquidity, so you provide a lot.”
Clients appear to be hesitating in placing the larger hedges that typically happen earlier in the year, he said.
“You have episodic trades, big hedges, big corporate trades, that happen along the year,” Pinto said. “Particularly in the first and part of the second, the amount of those trades, even though the pipeline is very healthy, they haven’t happened. It looks like they are going to happen later in the year, and that is a big swing factor.”
The industry’s shrinking results are being caused more by low volatility and monetary policy than by new regulations, he said, adding that investment banks may have to wait until 2016 before revenue improves.
“Probably we will have a flattish year next year, and then probably with all that we talked about before -- markets will grow, normalization of interest rates -- all that will sort of bring revenues up again,” Pinto said. “It’s probably a bit more down the line.”