Big market turbulence, big harvest on Wall Street: trading frenzy brings surprising results

The Zhitong Finance App learned that after experiencing a market driven by government spending and low interest rates caused by the pandemic, large banks in the US have ushered in a trading frenzy. Increased volatility has instead boosted trading activities. Despite market concerns about interest rate hikes and uncertain economic prospects, banks such as Goldman Sachs (GS.US), Bank of America (BAC.US), Citigroup (C.US), and JPMorgan Chase (JPM.US) all surpassed expectations in the third quarter, indicating that they have found ways to continue growing during the boom period. These banks' stock and fixed income trading volumes have reached record highs, and net interest income has also increased, indicating that loan revenue is relatively resilient to the Federal Reserve's recent interest rate cuts.

In this uncertain quarter, Wall Street's trading department had a windfall. Goldman Sachs, Bank of America, Citigroup, and J.P. Morgan Chase all surpassed analysts' expectations in terms of stock and fixed income trading volumes, especially stock traders, who had the best third quarter on record. Due to sharp market fluctuations and investors' close attention to economic data, both the S&P 500 Index and the VIX Index experienced significant fluctuations.

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Goldman Sachs CEO David Solomon mentioned during the earnings call that customers are very active globally, thanks to an uncertain environment where they need to constantly engage, reposition, and reinvent.

Furthermore, high interest rates are beneficial to banks because they can absorb cash in the form of deposits and charge fees through loans. The net interest income of Bank of America, Citigroup, and J.P. Morgan increased by an average of 3%, showing the resilience of loan revenue to the Federal Reserve's recent interest rate cuts.

The good times on the trading floor continued, especially at an industry conference in September, when executives from major banks lowered their expectations. Goldman Sachs's unexpected growth can be described as a reversal of fate. Previously, when there were only three weeks left in the quarter, Solomon said that transaction revenue could drop 10% from the same period last year.

Bank of America also reported positive results, with revenue from stocks, fixed income, foreign exchange, and commodities trading up 12%. Although CEO Brian Moynihan announced a single-digit increase in revenue last month, Jim DeMeyer, head of the bank's marketing department, pointed out that the increase in trading volume has “a favorable environment for stock investment.”

Citigroup's chief financial officer Mark Mason attributed the surge in stock trading revenue to growth in the index and individual stock trading sector. He said the company's programmatic transactions and high-touch trading activities have also seen significant growth.

Morgan Stanley will announce its third-quarter results on Wednesday. Analysts expect a 2.2% increase in trading revenue and believe that the increase in stock earnings will be enough to offset the decline in fixed income. Morgan Stanley has long been the largest stock trading company on Wall Street, but in recent years it has relinquished this title to Goldman Sachs.

According to Moody's Ratings analysts, the average quarterly revenue of debt and stock traders at the top five US banks exceeded $25 billion from 2020 to mid-2024, far higher than less than $20 billion between 2014 and 2019.

Although transaction performance generally exceeded expectations, the performance of the investment banking business was uneven. Most of the trading boom in 2021 has subsided, but it is hoped that lower interest rates will stimulate acquisitions and thus help traders. Goldman Sachs's share underwriting revenue in the third quarter of 2021 was approximately $1.2 billion, three times that of the past three months. Earnings for the quarter have increased 45% to nearly $3 billion, exceeding expectations.

Even banks were caught off guard by this success, and executives kept expectations low. Goldman Sachs's Solomon predicted a drop in trading volume last month, but that wasn't the case. J.P. Morgan's Jamie Dimon is pessimistic about the economy, but the bank believes that interest rate cuts will only cause net interest income to shrink within a few quarters before starting to grow again in the second half of 2025.

Overall, large banks are likely to come out of the most turbulent period in recent years in a steady state, and when capital becomes cheap again, they will be ready for a frenzy of mergers and IPOs. The new normal that people fear may never be realized, and banks may find that they don't need it.

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While executives are optimistic about the Fed's ability to achieve a soft landing, they also warned that lingering uncertainty could affect this trajectory. J.P. Morgan CEO Jamie Dimon said after most of the bank's metrics surpassed expectations: “I have made it very clear that I think the future could be quite turbulent.”