The pendulum has swung. The era of the fixed income trader is over. The investment banker with the bulging pipeline is back (baby).
Fixed income trading businesses are not doing well. Morgan Stanley's fixed income trading revenues were down 43% year-on-year. Goldman Sachs' fixed income trading revenues were down 44% year-on-year. Bank of America's were down 19%.
There are no new fixed income redundancies, yet. But as we noted last week, banks like Morgan Stanley are cutting risk in fixed income trading and will almost certainly need to cut pay if they want to increase their return on equity to acceptable levels.
Brad Hintz, analyst at Bernstein Research says fixed income trading jobs are on a long term downwards curve. "Staffing on trading floors is shrinking and trading headcount is being 're-priced'," says Hintz in reference to Goldman Sachs. "Further, to reduce back office costs, Goldman has expanded to low-cost support locations in Bangalore, Singapore, Dallas, and Salt Lake City," he points out.
Instead of investing in fixed income traders, banks are investing in fixed income trading technology. Goldman Sachs is investing heavily in fixed income trading technology, said Hintz. This is despite apparent problems with GSessions, its electronic bond trading platform. During last week's conference call, James Gorman said Morgan Stanley was investing in 'people and technology' in fixed income trading. However, Ruth Porat, Morgan Stanley's CFO also said that electronic trading in fixed income was up in Q3, while voice trading was down. Voice trading is higher margin, said Porat. Voice traders merit higher pay, but their business is shrinking.
While fixed income traders are supplanted by electronic systems and repriced downwards, investment bankers are experiencing a renaissance. Advisory businesses have the dual advantages of high margins and minimal regulatory capital requirements.
"While we expect trading to remain a focus for the firm, we also believe constraints on that business will lead the firm to emphasize investment banking, merchant banking, and asset management," Hintz said of Goldman Sachs.
The investment banking pipeline is currently at a five year high, Hintz observes. For fixed income bankers, things are getting worse. But for people in M&A and ECM, things can only get better.