Wall Street Faces a Grim Third Quarter

After two months bankers would like to forget, Wall Street may need a September to remember to avoid the worst quarter for investment banking and trading revenue since the peak of the financial crisis. "Activity levels in the last three weeks of September should be a lot better than July and August, but it would have to almost be off-the-charts good to save the third quarter," says Jeff Harte, a Chicago-based analyst at Sandler O'Neill & Partners.

Troubling economic data and uncertainty over European sovereign debt and the global recovery led investors to step back from the markets, analysts say, cutting the volume of stock and bond trading. Equity investors traded a daily average of 14.2 billion shares on U.S. exchanges in the third quarter through Sept. 3, according to Bloomberg data. That's the worst start of any quarter since the first three months of 2009. Corporate bond trading in July and August was down 8 percent from the same period in 2009, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The five largest Wall Street firms by investment banking and trading revenue—Goldman Sachs (GS), JPMorgan Chase (JPM), Citigroup (C), Bank of America (BAC), and Morgan Stanley (MS)—may not get much of a boost from their advisory work. While the dollar value of completed mergers and acquisitions is up slightly for the first two months of the quarter from the same period last year, debt and equity underwriting totals have fallen. The five firms generated $67.1 billion in the first half of the year from advisory, debt and equity underwriting, and trading stocks and bonds. That was down 12 percent from a year earlier. They booked more than five times as much revenue from trading in the first half as from advisory and underwriting.Spokesmen for the five banks declined to comment about third-quarter trading or their investment banking businesses.

A recent flurry of deals offers hope for future quarters. Companies announced mergers and acquisitions totaling $404.5 billion in July and August, more than double the $195.2 billion a year earlier, according to data compiled by Bloomberg. Along with helping banks generate greater fees, more deals will spur increased stock and bond trading, says Richard Bove, an analyst at Rochdale Securities in Lutz, Fla. "If the M&A market picks up the way I think it will, [it] will give a boost to get trading going again," Bove said in an Aug. 23 Bloomberg Television interview. "This recovery in trading is not going to be very dramatic, and it's not going to be very quick. It's going to be over a longer period of time."

The bottom line: After a slow summer, Wall Street needs a burst of activity in September to avoid a weak third quarter in investment banking and trading.

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