Stirring market seismograph relief for ailing trading industry
(Refiles to add dropped word "British" in paragraph 2)
By Jamie McGeever
LONDON, Sept 23 (Reuters) - Recent stirrings of long-dormant financial market volatility have come in the nick of time for an industry that has been bleeding revenue and jobs for years, even though bankers doubt the secular downsizing of the trading world can be reversed.
The prospect of higher U.S. interest rates, and to a lesser extent British interest rates, has provided a shot in the arm for market activity and banks' trading operations since the half year mark.
Trading in fixed income, currencies and commodities (FICC) has been steadily falling since the 2008 crisis, in large part thanks to a collapse and convergence of interest rates across the developed world that has crushed volatility.
Key measures of price volatility - particularly in currencies, which in large part trade on interest rate differentials - have sunk this year.
Implied volatility in euro/dollar and dollar/yen, the two most liquid currency pairs in the world, fell to a record low in July . U.S. stock market volatility hit a 7-year low and bond volatility languished near recent depths.
Low volatility limits price swings and narrows bid/offer spreads, thereby minimizing banks' scope to make money. Post-crisis regulation such as 'Dodd-Frank' and 'Volcker Rule' legislation in the United States and Basel III banking reforms globally also effectively restrict banks' ability to hold, trade and speculate on fixed income and derivatives.
But volatility has since reversed, lifted by U.S. rate speculation and a range of geopolitical flare-ups that caught markets offguard. Treasury bond and FX market volatility rose to levels not seen since January.
"Fixed income does show like it's showing a few signs of life. But we're not out of the woods," said Chris Wheeler, banking analyst at Mediobanca in London.
So far this year, the trading environment has been tough for banks' FICC operations, which critics sometimes dub "casino banking" and distinguish from traditional investment services like underwriting share issues or arranging mergers and acquisitions.
Reuters data show that of 10 major U.S. and European investment banks, only Morgan Stanley and Bank of America-Merrill Lynch raked in higher FICC trading revenue in the first half of this year compared with the same period last year.
The other eight saw revenues fall, from Credit Suisse and Societe Generale's 6 percent decline to the 23 percent slump at Barclays. The average decline across the 10 banks was 10 percent.
http://graphics.thomsonreuters.com/14/02/BANK_IBREVENUE0214_VF.html