Large Banks Are Failing To Profit In This Low Volatility Environment

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Today was the 7th Annual Global Financial Services Conference, hosted by Deutsche Bank. I don’t know too much about these Financial Services conferences, and I don’t know what people actually do at these meetings. However, I did managed to catch a glimpse of the presentations via the Investors Relations section of JP Morgan Chase & Co’s website and I’ve learned a couple of interesting things.

I’ve often talked about the small amount of volatility (or rather expected volatility) in our current financial climate, as measured by the VIX. Within the last two years, the negative correlation between the VIX and S&P 500 has declined. This naturally explains the increased amount of complacency in our financial markets. It also explains why even during a time of greater economic uncertainty, we’ve barely seen any spikes in VIX.

The last time I’ve looked at the VIX, it was trending around 12.42. Now it’s around 10.77. The more things change, the more they remain the same.

Volatility is a crucial component when trading certain financial instruments such as FOREX, Fixed Income, or Options (ESPECIALLY Options, but that is a subject for another day). Sure, a low level of volatility is associated with a small degree of risk. However, it’s also associated with a lower return as well; a fact well known by JP Morgan Chase CFO Marianne Lake, who presented at this year’s Global Financial Services Conference.

A few interesting points she has made:

  • “Low rates, a more cautious outlook on rates, low volatility have led to low client flows and a generally quiet, subdued and challenging trading environment”
  • “There’s not a lot to trade around right now, and so there’s not a lot of market themes.”
  • “Markets revenue at JPMorgan Chase has been down about 15 percent so far in the second quarter from a year earlier”

JPM wasn’t alone; Bank of America CEO Brian Moynihan shared in their plight

  • “Bank of America 2nd Quarter trading revenue will be lower than a year ago”

Other large players in the financial sector (Citigroup, Morgan Stanley, Goldman Sachs) have all see their notable declines in their share prices, and the markets have followed suit.

To compensate for a low volatility environment, a significant amount of capital (or leverage) needs to be utilized for banking carry trades. If financial institutions, the ones with the greatest amount of resources, cannot find a way to weather this drought, I doubt the average mutual fund, hedge fund or even day trader is doing any better right now.

The world can use a pretty good Grexit/Frexit right about now.

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Andre is a senior at Pace University, studying Finance and Economics. His topics of interests include Equity Valuation, Short Ideas, Macro, Monetary Economics, ETFs, Forex and Fixed Income. His sectors of choice involve Technology, Consumer Goods, and Financials. Andre has completed a number of internships at leading investment banks domestically and abroad.