March 8, 2016    5 minute read

Where is the Sales and Trading Business Heading?

   March 8, 2016    5 minute read

Where is the Sales and Trading Business Heading?

As is widely known, high volatility has been underlying global markets over the past months due to several events. Starting in 2015, investors have been concerned about the slowdown in China, which had been driving global economic growth over the past few years. Another factor is given by the oil price, due to excess supply, which OPEC would be cutting just under a key condition: non-OPEC countries would have to cut production as well, thus avoiding to capture the market share that OPEC countries would be giving up. Negotiations have been failing, because of the presence of American shale oil producers, which, being much more flexible, are managing to survive, giving OPEC another reason not to cut production. Additionally, oil is generating another issue: deflation. It has been estimated that the CPI is lower by approximately 1% due to lower oil prices.

The aforementioned is to lay the foundation to discuss the Sales and Trading business. This business can be compared to a bakery shop: in the front, there are the clerks dealing with the bread and trying to sell it according to customers’ needs. In the back, there are the bakers baking the bread, who know everything about it, the Traders in this case. Also, the salespeople are provided with more personalised products: pizzas, sandwiches, where the main element is the bread but they present some features adapted to clients which have specific needs. These products are provided by some other bakers, the Structurers.

Going now back to the trading floor, it is possible to identify two sub-businesses: FICC (Fixed Income, Currencies, and Commodities) and Equities.

The former has been hit especially hard by marker uncertainty. Having spoken to several traders, it is evident how complicated it was (and still is) to manage their positions. Currencies witnessed the greatest unpredictability. Think of China devaluating the renminbi, more than once, in order to sustain growth through exports: this has caused disruption across markets, worried about a possible recession of China. This has contributed to a higher depreciation of some currencies, like those related to commodity-exporting countries.

Other examples are given by the BoJ, which has surprised markets by setting rates in negative territory and the ECB which, in December, disappointed markets so causing the euro to depreciate. Commodities have clearly been impacted by aforementioned China. China has been fueling its very high growth mainly through the industrial sector, sustained through the import of several commodities like iron, copper, aluminium, zinc and so forth. Following the slowdown, the bubble burst so sending those prices very low (including oil price). Fixed Income has seen a very low profitability because of low rates, equal almost to zero, or even negative, across the main economies. The FED started lifting rates, but it is currently stuck due to worries related to the American economy and to Emerging Markets which have piled up a huge amount of dollar-denominated debt. The US is well recovering from the crisis as demonstrated by data released on March 4th. Non-Farm Payroll was higher than expected, even if wages slipped 0.1% MoM. An important role will be played by Brexit: if the UK leaves Europe, there might be a butterfly effect which would be causing generalised interest rates liftoffs.

On the other side of the coin, there is the Equities business. Currently, this business can be seen as a cartel, where the two main players are Goldman Sachs and J.P. Morgan. Equity performances across the globe have been very similar: disappointing. It is well known as to how bad the beginning of 2016 has been, due to worries linked to China, which caused heavy generalised sell-offs. Because of lower economic growth and commodity prices, some sectors suffered significantly. In particular, the Industrial, Energy and Banking sectors have been struggling, the last one especially because of the exposure towards the first two sectors and to Emerging Markets which are and will be struggling from interest rate liftoffs by the FED (as explained in my previous article). Also, it has been possible to see a very high, almost perfect, correlation between oil price and Equity Markets over the past weeks.

It can be argued that the S&T business is not as profitable as before. Both FICC and Equities are very capital intensive therefore smaller players, mostly European players and lastly Morgan Stanley Commodities (probably because the RAROC was lower than in other divisions), backed off already by slashing jobs and reducing their exposure. Profits are being also hit by an increasing regulation, Volcker Rule, Basel and TLAC to mention but a few, which are good on one side since banks want to make sure they are honest, fair, transparent with their clients; clearly on the other side, it ends up reducing an already low profitability. Additionally, there are large investments in FinTech, so in electronic trading and platforms which enable the bypassing of both Salespeople and Traders.

Given all the elements mentioned, I would expect more muted S&T activity in banks from Continental Europe. The lost market share will be probably gained by bigger and stronger players, i.e. American players, which will be dominating the scenario. Is the human presence going to be replaced totally? I do not think so, given that the Structured business needs the human presence because of its nature. Also, the Flow business is based on human relationships which cannot be replaced by electronic platforms. Is it still worth to be pursuing a career in S&T? It might be more competitive on one side given the even fewer positions available, but also more exciting given the events that are and will be characterising markets over the next years.

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