It could be entirely coincidental that fixed income revenues have collapsed at the same time as investigations widen into alleged collusion and fixing. But then again, maybe not. My latest column for Financial News.
Investment banks can see the writing on the wall for their fixed-income divisions, and they don’t like what it says. One of the least attractive and most challenging aspects of the convergence between fixed income and equities trading – driven largely by regulatory pressure to push more trading onto electronic platforms – is that fixed-income trading could become about as profitable as equities. In other words, not very.
This looks as if it is already happening. This year, revenues from fixed income, currencies and commodities trading have fallen by about 15% across the industry, according to my analysis, and are heading for a decline of about one fifth for the whole of 2013. The slowdown was particularly pronounced in the third quarter, in which overall revenues dropped by 28%, with some big investment banks such as Barclays, Deutsche Bank and Goldman Sachs posting declines of more than 40% compared with last year.
The collapse in FICC revenues will wipe more than $20 billion off the top line of the big 14 investment banks. Revenues from interest rate trading – bread and butter for most investment banks – have fallen by about 40% this year, according to research firm Coalition, and are down by about two thirds since 2009.
There are plenty of reasons for the drop in FICC revenues, ranging from low volumes over the summer as exhausted clients headed for the beach, to the on-off debate about when central banks will start turning off the money taps.
But there might be a simpler explanation for the downturn in FICC. Over the past few months, allegations and investigations into potential collusion between traders in online chat rooms have been spreading across the industry. The accusation is that traders at different banks shared customer and position information with each other, enabling them to position themselves, manipulate rates and therefore make more money.
This sort of behaviour is far easier in the over-the-counter world of FICC trading, where trading takes place via thousands of bilateral deals with less transparency than the equities market, which is dominated by centralised electronic trading and clearing.
The “equitisation” of fixed income was always going to reduce the informational advantage enjoyed by investment banks and therefore make the business less profitable. Could it be that as investment banks stamp out the practice of traders sharing information with each other on a regular basis, those profits fall further and faster? Put simply, in a world where banks can’t collude with each other any more, fixed-income trading becomes about as profitable – or unprofitable – as equities.