Reduced competition juices banks’ trading records

By Dan Wilchins – Analysis

NEW YORK (BestGrowthStock) – Four major banks generated trading profits every day in the first quarter, an almost unheard of event that signals how competition has abated since the financial crisis began.

Banks including JPMorgan Chase & Co and Goldman Sachs Group Inc consistently made money from trading, as many financial markets recovered, according to quarterly financial filings with regulators. A series of market factors, including low short-term interest rates, also helped.

But a key factor is that Lehman Brothers, Bear Stearns, and Merrill Lynch have been absorbed into larger banks, leaving fewer banks willing to buy and sell securities from customers, particularly when it comes to bonds, credit and fixed income derivatives, analysts and investors said.

The banks that are left are able to extract more money from clients, investors said.

“The biggest firms have an advantage now,” said John Sprow, chief risk officer at Smith Breeden Associates, a fixed income manager with about $8.5 billion of assets under management.

A hedge fund manager in New York added the prices that dealers will quote for transactions vary much more than they used to and depend more on whether a deal will reduce the bank’s risk or increase it.

“They’re charging you for their balance sheet now,” he said.

Not everyone agrees that the demise of banks such as Lehman was a key factor in the quarter. Some investors noted that the gap between the prices at which dealers will buy and sell the same security has narrowed substantially over the last two years, usually a sign of markets with active and competitive trading.

In addition to JPMorgan and Goldman, Bank of America Corp had a perfect quarter, according to its quarterly filing. And Citigroup Inc also made money from trading every day of the quarter, a person familiar with the matter said. The bank declined to comment and does not disclose that information in its quarterly filings.

Morgan Stanley, Goldman’s archrival, was the odd man out among big banks and had trading losses on four days during the quarter.

Other factors also help explain the perfect quarters, traders said. Short term interest rates were low relative to long-term bond yields, meaning banks could borrow at short-term rates and hold onto longer-term securities and make a healthy profit.

The U.S. stock market rose, U.S. corporate bonds rose relative to Treasuries and, generally, sentiment improved across markets globally, making for easy profits for any dealer owning securities. Customer trading was active, so banks could make good money just by linking up buyers and sellers.

Replicating those sterling first quarter results will be tough. JPMorgan Chase said in a quarterly filing that the high level of trading and securities gains in the period is not likely to continue for the rest of the year.

Sentiment in many markets has weakened so far this quarter, as U.S. equities drop and European sovereign debt looks increasingly wobbly.

And more European and Asian banks are ramping up trading activity globally, adding competitive pressure.

The first quarter may have been the rare perfect storm for dealers that propels the ship forward instead of destroying it.

“It’s very hard to conceive of this continuing unabated,” said Marshall Front, chairman of Front Barnett Associates in Chicago, which manages more than $500 million in assets.

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(Reporting by Dan Wilchins; editing by Andre Grenon)

Reduced competition juices banks’ trading records