Banks' trading businesses have been struggling recently. It's no secret that banks have been forced to make multi-billion dollar writedowns resulting from their involvement with credit products related to US sub-prime mortgages.
Some, but not all of these huge losses were made by banks' fixed income trading teams - particularly those working with 'collateralised debt obligations' (CDOs). CDOs are complicated derivative products, often based on sub-prime mortgages. They were supposed to allow risk-averse investors to buy a less risky slice of exposure to these assets, but turned out to be very risky indeed.
One of the banks most badly burnt in the credit crunch was UBS, which has lost over $40bn and counting, and now promises to pull back from risky trading activities involving its own cash. However, it wasn't the only one to feel the pain - Lehman's sub-prime related losses now stand at $15bn.
Banks' revenues within traditional sales and trading products also seem to have taken a battering. For example, Goldman Sachs is the only major investment bank to have increased its equities sales and trading revenues in the second quarter of 2008 versus the same period last year - it's up by 6.7%, according to data compiled by Credit Suisse.
Still, year-to-date global equity value traded is up 5% with Dubai strongest (+54%) and Bursa Malaysia weakest (-44%), according to data from the London Stock Exchange.
August seems to have been a bad month for the erstwhile positive trading volumes within complex derivative products. To the end of August, trading activity within options and futures contracts on the NYSE Euronext derivatives trading platform, Liffe, was up by 12.6% on the same period last year.
However, August itself witnessed a 38.9% decline compared to the same period in 2007. Similarly, trading on the Chicago Mercantile Exchange, the world's largest derivatives exchange, tumbled by 32% in the same month. Banks' stretched balance sheets have made it harder to trade and this is having an effect on their appetite for more risky products.
Shoring up banks' balance sheets this year have been the rates and forex divisions (which technically fall within fixed income). A research note by Credit Suisse reports that many banks have reported record revenues in this space so far this year.
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