Traders are walking zombies on Wall Street
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Opinion: Forces have converged, putting an end to the age-old investment profession
The signs are everywhere on Wall Street. Trading floors that once buzzed with noise and energy are now as silent as cathedrals . Big firms that reaped huge profits from trading stocks, bonds, commodities and currencies are turning to staid money management to boost earnings.
What once was the main event is now just a sideshow. There are many fewer traders now, and they’re making much less money. And there are going to be even fewer very, very soon.
With one big exception I’ll discuss later, trading is dying.
And it’s not just stock trading, where volumes are slightly more than half of what they were five years ago. Fixed income, currencies and commodities trading (FICC), Wall Street’s huge profit driver of the 2000s, is in deep, deep trouble.
Bitter traders watching the gravy train leave the station blame regulators for tying Wall Street’s hands or the Federal Reserve’s unconventional monetary policy, which suppresses interest rate spreads and volatility that are traders’ bread and butter. That’s what’s really behind former pit trader and CNBC commentator Rick Santelli’s increasingly strident, desperate rants over the past few months.
And the so-called “debate” in the financial media about whether this decline is cyclical or permanent is completely phony. It’s not coming back, guys, so maybe you should learn a useful trade like being a plumber or electrician. I’m serious.
Problem is, tighter regulation stemming from the 2010 Dodd-Frank Act, the Fed’s zero interest rates and extraordinary bond-buying, and the end of a three-decade-long bull market in bonds have changed the landscape forever.
As of 2013, FICC trading on Wall Street plunged 23% from 2010, The Wall Street Journal reported. And although second-quarter trading revenues were not down as much as some firms had projected, they’re still deteriorating . At Morgan Stanley MS -0.48% , which is leading the retreat from trading, FICC trading revenues have plummeted 60% from 2006 , based on data in a study by Freeman Consulting.
“Essentially, the execution businesses are in deep trouble — and fixed income is in the worst shape,” said Brad Hintz, veteran analyst at Sanford Bernstein & Co., who is retiring to teach at New York University’s Stern School of Business.
“ROEs (return on equity) in trading … have been cut in half,” Hintz told me. And the cuts Wall Street firms have made so far don’t “solve the fundamental problem. The trading businesses on their own are not beating their cost of capital.”
In other words, Wall Street trading desks aren’t pulling their weight. That will ultimately translate into even fewer bodies on trading floors.
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