It’s a difficult time to be a big bank commodity trader. Trading revenue in fixed income, currencies and commodities (FICC) is down significantly at the bank.  What, with regulatory agencies around the western world cutting down on documented market manipulation in Libor, currency and commodity markets, the old big bank prop desks could be facing a new market environment.  In fact, some traders at prop desks now might be forced to play by the same rules as their hedge fund brethren, is the talk. But one market environment that can be discussed publicly influencing bank trading revenues is volatility.

FICC Local Currency

JPMorgan says FICC revenue drop due to lowered volatility

When considering the drop in FICC trading revenues, JPMorgan Chase & Co. (NYSE:JPM) says its lower volatility at issue. Investment bank revenue continued to drop amid “multi-year low volatility in key product areas (Rates and FX) leading to lower activity levels and margins.“  The bank wasn’t overall optimistic on the second quarter of 2014, with the expectation revenues in FICC will drop by 19%.  Although they cite the anticipation of lower volatility, it remains unclear how a bank can predict trading revenues as the market environment in the future remains unknown?  The JPMorgan author of the report did not return comment before press time.

Jpmorgan FICC

“We estimate 2Q 14E FICC revenues to be down -19% Q/Q. Rates and FX continue to be impacted by low volatility, leading to low activity levels. FX volatility is at its lowest point since 2007 (J.P. Morgan G7 Volatility Index) while Rates volatility (MOVE Index on Bloomberg) is also close to multi-year lows seen in Q1 2013,” the Cazenove Europe Equity Research note dated May 29 said.  This statement seems to paint a picture of diminished volatility to come.  How exactly volatility is being predicted remains unclear, yet a number of studies and commentary indicate a new rate regime at the US Federal reserve may lower the normalized short term Fed funds rate target on the yield curve.  Such a move, that could lead to theoretically lower volatility, might be part of a discretionary calculation.

FICC yield curves

Questioning Credit Suisse business model

The JPMorgan research note concluded by noting its investment thesis of various banks the firm competes with. JPMorgan Chase & Co. (NYSE:JPM) remains underweight Credit Suisse Group AG (ADR) (NYSE:CS), saying “we believe CSG’s IB (investment bank) strategy is unsustainable in the long-term.”  The report did not mention that Credit Suisse currently the subject of a DoJ investigation regarding tax evasion.

FICC Bid-ask SPreads and volatility