Securities firms’ business models have also changed markedly. Back in 1994, New York Stock Exchange member firms walked into the tightening cycle with $265 billion of securities inventory on their balance sheet, which unwound to drastic effect. As a result of more recent regulatory requirements around capital and liquidity, as well as market preference, firms tend to facilitate trades on an agency basis rather than act as principal. At the big U.S. banks, trading inventory accounts for around 14% of total assets, down from 23% 10 years ago.
Yet while a blow-up may be less likely, underlying trading conditions are far from buoyant. The first quarter is typically the strongest of the year for securities firms – and it’s not shaping up that well. Jefferies Group reported its fiscal first quarter results last week for the period ending February 28. Fixed income trading revenues were down 44% on the year. “Fixed Income net revenues were lower,” a company statement said, “primarily due to lower trading volumes in the face of inflation concerns and interest rate uncertainty.”
For many banks and brokers, last year was a record year. Traders may argue their business is more robust than in 1965, 1984 or 1994, but they operate in a cyclical business. A soft landing for the economy may not mean a soft landing for them.
Marc Rubinstein is a former hedge fund manager. He is the author of the weekly Net Interest newsletter on financial-sector themes.