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Banks May Need to Cull Their Trading Desks Further

Category: Business,Finance

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Bankers should watch their backs.

There are fewer of them trading fixed-income, currencies and commodities than there were four years ago. But cost-cutting is failing to keep pace with the declines in the revenue that banks make from this business, and that spells a new wave of job cuts on dealing floors.

For the 13 biggest global investment banks, the combined cost of such trading is equivalent to 75 percent of the revenue they make from it, according to the analytics company Tricumen. That is broadly unchanged from a decade ago, despite cost cutting.

The number of fixed income traders working at the top 12 investment banks has fallen by 12.6 percent in the past four years according to the data provider Coalition. But the revenue that these financial institutions make from fixed income trading has declined 15 percent over the same period. Credit looks particularly shaky: trading revenue from this division has fallen by 45 percent since 2014.

The trend is unlikely to reverse because there is no sign of a return to the higher interest rate volatility environment that is the most lucrative. Certainly, not this year. In the first six months — the period when investment banks typically make most of their earnings — fixed income trading generated revenue of $38.5 billion for the top 12 banks, according to Coalition data. That was little changed from the same period a year earlier.

European bankers may be particularly vulnerable. Revenue from fixed income trading has declined more markedly in Europe than globally. The European Central Bank’s policy of keeping interest rates ultralow is also eating into regional lenders’ profits.

Another danger is Britain’s planned departure from the European Union, which is forcing banks to set up multiple centers in the region. Rather than duplicating cost bases, banks are likely to use technology to replace humans.

Depleted dealing rooms are set to shrink further.

Christopher Thompson is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.

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