If you're a fixed income currencies and commodities (FICC) trader, 2019 has not started well. Thanks to the wrong kind of volatility at the end of 2018, most banks experienced double digit percentage reductions in their fixed income sales and trading revenues compared to the fourth quarter of 2017. As the chart below shows, the worst performer was Morgan Stanley, whose fixed income revenues fell 30%, but other banks didn't fare much better.
If you work at Goldman Sachs in particular, this looks like bad news. As traders there will know, the bank is in the middle of a 'back to front review' of its business areas which sounds ominous if you're working in a capital-intensive area which appears to be in secular decline.
Goldman's new CEO David Solomon and its new CFO Stephen Scherr said this week that the bank has reduced expenses in its FICC business by 30% in the past three to five years, and that risk weighted assets have been cut by 40%. In the past decade, Solomon observed that the bank has increased its FICC market share, from around 8.5% to around 12% - but its FICC revenues have declined. "The available wallet in market intermediation for large institutions has materially declined over the course of the last five years," lamented Solomon. Goldman is chasing a shrinking market. So too are its rivals.
What's an aspirational fixed income trader to do? If you don't want to lose your job - either in the coming review at Goldman, or in the future at any other bank, you need to shunt into electronic trading. This is where the market is moving, and everyone knows it. Goldman invested heavily in its electronic trading capabilities last year and achieved a massive 40% increase in FICC electronic revenues compared to 2014, said Solomon this week.
Through this kind of "platform electronification," Solomon said Goldman should be able to increase its margins and capture a higher volume of fixed income trades in future. "We're investing in automation as we expect many businesses within FICC to evolve similarly to equities," he added. Elsewhere in FICC, he said the firm sees, "an opportunity to further reduce expenses."
Basically, electronic trading is getting all the growth, human-trading is getting all the cuts. Electronic trading is the place to be.
It's not just Goldman Sachs. As the chart below from Greenwich Associates reflects, electronic trading among European buy-side fixed income traders has taken off in the past year. "“Algos are definitely becoming a bigger part of fixed-income trading… What you’re seeing is lots of algos are being created by banks to trade smaller size tickets,” one multi-asset trader at a hedge fund told Greenwich.
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