“We’re seeing huge dislocations in markets in this year,” said Atul Lele, the chief investment officer at Deltec International Group. “It isn’t the type of volatility where you see opportunities come out of the woodwork.”
Currencies, Bonds
A similar picture is taking shape in other markets. After putting on a record amount of futures contracts in December, traders have since scaled back wagers on the direction of the dollar against eight major currencies as implied volatility jumped. The last time conviction was so weak in terms of positioning was in 2014.
In Treasuries, long considered the deepest and safest market on the planet, average daily volume among primary dealers fell to $444 billion in April, just above its low in December 2009. That occurred after some measures indicated that swings 10-year Treasury yields soared to record levels, according to TD Securities.
“The state of the world -- it’s fragile at best,” Bob Savage, the CEO of CCTrack Solutions, a New York-based hedge fund.
To a growing number of investors, the fact that markets have become more turbulent and less liquid is a direct and unintended consequence of the structural changes wrought by post-crisis regulations -- which were intended to make banks safer.
Whether it’s because of trading restrictions or capital requirements, they’ve diminished the role of big banks as the market’s primary middleman as risk-taking has become more and more costly.
Hard Hit
Last quarter, trading revenue at the five largest U.S. investment banks fell to a seven-year low. Goldman Sachs Group Inc. reported its worst first-quarter revenue of CEO Lloyd C. Blankfein’s tenure.
Trading in fixed income, currencies and commodities, or FICC, has been particularly hard hit. Globally, the biggest investment banks have seen revenue from FICC sales and trading decline in five of the past six years, according to Bloomberg Intelligence.