If you work in fixed income trading, you are almost certainly earning less than you were two years ago.
A graph from research firm Coalition illustrates why. Whilst revenue per producer has been remarkably stable in equities and origination/advisory businesses, in fixed income it has fallen - substantially. It was (artificially) inflated in 2009 and has declined ever since.
If you work in fixed income, this is probably already known to you. The bad news is that further declines seem inevitable.
Last week’s investor presentation from JPMorgan included the following chart showing the revenues it earns per type of trade, and the average volume of trades it executes. Fixed income trades are far more lucrative than equities trades, but equities trades partially compensate through their sheer volume.
Fixed income trading is expected to become more like equities trading in future.
In its most recent 10k filing, Goldman Sachs outlined the issues facing all its trading businesses:
“We have experienced intense price competition in some of our businesses in recent years. For example, over the past several years the increasing volume of trades executed electronically, through the internet and through alternative trading systems, has increased the pressure on trading commissions, in that commissions for “low-touch” electronic trading are generally lower than for “high touch” non-electronic trading. It appears that this trend toward electronic and other “low-touch,” low-commission trading will continue. In addition, we believe that we will continue to experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by further reducing prices.”
In summary, therefore, Goldman – and other banks – are investing heavily in their electronic trading businesses. And this, is pushing margins down.
Following conversations with Goldman Sachs, research firm CreditSights says the bank is keen to increase the use of, “low touch, low commission,” electronic trading in its fixed income business too. However, it’s waiting for clarification of derivatives trading rules under Volcker and Dodd Frank before making the investments necessary.
The implication is clear: if you work in fixed income, this current period is a reprieve. As soon as the legislative landscape is clear, banks’ investment in electronic fixed income trading infrastructure will increase dramatically. And when this happens, both their need for fixed income traders – and fixed income traders’ pay – will fall more again.