Goldman Sachs Explains Why Trading On Wall Street Stinks Right Now

Goldman sachs tradersREUTERS/Lucas JacksonTraders work in the Goldman Sachs booth on the floor of the New York Stock Exchange in New York.

The recent lack of volatility in markets has many investors scratching their heads.

Both Citigroup and JPMorgan have warned that revenue in their trading segments will plunge in the second quarter.

And now Goldman Sachs has chimed in on the lack of volatility and activity in the markets.

In a presentation yesterday at the Sanford C. Bernstein Strategic Decisions Conference, Goldman Sachs president and COO Gary Cohn explained low volatility “discourages hedging and delays opportunistic investing.”

He gave some context on how this lack of market action stacks up historically.

10-Year U.S. Treasury Yields are in their tightest trading range since 1978.

Meanwhile, the CBOE Volatility Index, or VIX, is subdued.

“The VIX is running almost 40% below its 10-year average,” said Cohn.

And the EUR/USD currency pair is in its tightest two-month trading range since the inception of the Euro 15 years ago.

In his comments, Cohn said (emphasis ours):

“Broadly speaking, the current operating environment is mixed, marked by both headwinds and tailwinds affecting different parts of our business. A notable tailwind has been the strength we’ve seen in M&A activity recently, with volumes in the second quarter on pace to more than double versus last year. This increase has been largely driven by strategic and cross-border activity. We’ve also seen continued strength in equity and debt issuance. Conversely, as we consider headwinds, volumes in a number of fixed income markets have been under significant pressure in 2014: FX volumes are down 45% versus 2013, mortgage-backed securities volumes are down over 20%, and corporate bond volumes are down almost 15%… As we have also witnessed in recent times, the consequence of global quantitative easing and low interest rates is low volatility… The point is, macro factors are driving reduced market volatility, which in turn weighs on volumes, bid-offer spreads, risk appetite and the ability of our clients to generate alpha. We understand that reality, and of course, we are not just waiting for things to get better. We are staying close to our clients, we are maintaining our risk-return discipline, and we are aggressively managing our capital and expenses.”

And here’s a look at trading volume through May.

Trading volumesGoldman SachsVolumes from Federal Reserve, NYSE/Nasdaq, Arca, CME, and Bloomberg. Federal Reserve average weekly volumes for 2Q14 as of May 7, 2014 vs. full 2Q13 average. All other volumes are average daily for 2Q14 as of May 16, 2014, vs. full 2Q13 average. FX and Interest Rates indicate contract volume

Read Cohn’s complete comments here and view his entire presentation here.

(via Bloomberg)

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