Citigroup, Inc. (NYSE:C)
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5 Years : From Jan 2013 to Jan 2018
NEW YORK (Dow Jones) -- To all the dramatic changes in stock trading over the last decade that have eroded one of the cornerstone businesses of Wall Street banks, add yet another from the first quarter of 2012: weak volume and low volatility that limited action in equities trading.
Despite an 8% run-up in U.S. stocks that saw the Dow climb back above 13,000 during the period, equity volumes were 16% lower than the prior quarter and 31% below year-ago levels, according to NYSE-listed share-volume data. The weakness comes on top of margin pressures that have cut commissions and spreads to just pennies per share.
As stock trading continues to migrate to electronic execution from human handling, the commissions banks can charge to handle trades -- and the money they make through premiums and discounts on asset trading -- has fallen dramatically.
"Commissions, obviously, in the equity business have gotten smaller across the industry," said John Andrews, Citigroup's head of investor relations. "The equity business has changed dramatically in the last 15 years."
The low volume and volatility in the first quarter further weighed on the business, particularly as large institutional investors such as pension funds, scarred by the stock market meltdown of 2008 and 2009, diversify away from equity holdings.
For the most part, revenue from equity trading at banks and commissions at retail brokerages improved from a lackluster fourth quarter but fell from year-ago levels. But all in all, banks appear to have largely adapted to what is now considered a commoditized business. Some firms held their own, others limited declines and a couple even booked gains.
"Equities appears a bit weaker," Barclays said in an industry assessment prior to earnings announcements over the last week, noting that banks would show better results in trading of fixed-income, currencies and commodities than in stocks. "We expect equity results to be pressured as market volumes generally declined, while reduced market volatility could weigh on derivative results."
The call was right: Across the major banks and retail brokerages, revenue from equity trading and brokerage commissions fell 7% on average from year-ago levels.
Citigroup (C) and Goldman Sachs (GS) both posted declines in equity trading revenue versus the year-ago quarter. Citi's fell 18% to $902 million and Goldman's dropped 3% to $2.3 billion. Morgan Stanley (MS) eked out a 5.8% gain, and J.P. Morgan (JPM) and Bank of America (BAC) reversed year-ago losses. In retail brokerage, E-Trade (ETFC) and Ameritrade (AMTD) posted declines of more than 13% in brokerage commission revenue, while Charles Schwab (SCHW) was largely flat.
Adam Sussman, research director at financial markets advisory firm TABB Group, said pressures on commission and spread revenue appear to have abated and the business has stabilized, at least for now. But firms remain dependent on strong volume for revenue, and suffer when they don't get it.
"Going back for a number of years it was a very weak quarter," Sussman said. "When activity's falling by double digits, you're likely to see that show up in the overall revenue and margins."
Another factor that may have undercut results is that big banks slashed the amount of risk they were taking on in the markets -- particularly equity markets -- which theoretically reduces returns. J.P. Morgan and Goldman Sachs both reduced their so-called value-at-risk -- a broad measure of how much a firm could lose in a single day -- in the equity markets by more than 40%. Bank of America cut its overall VAR by 54% to $84 million.
In its earnings release, Goldman said its results were impacted by lower commissions and fees because of reduced market volumes.
"During the first quarter of 2012, equities operated in an environment generally characterized by an increase in global equity prices and lower volatility levels compared with the fourth quarter of 2011," the bank said.
-By Christian Berthelsen, Dow Jones Newswires; 212-416-2381; firstname.lastname@example.org