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The outlook for traders (and trading bonuses) just got worse

The first three months of 2018 belonged to Wall Street traders, despite news continuing to trickle in about their eventual demise. Most every U.S. bank saw substantial upticks in equities and fixed income trading revenue, led by Morgan Stanley, Goldman Sachs and J.P. Morgan. But if April is any kind of litmus test for the second quarter, earnings calls will again see the performances of trading businesses be glossed over.

Equities trading volumes in the U.S. fell 10% from March to April and 16% year-over-year, according to a new report from the Buckingham Research Group. A similar trend occurred overseas where international equities trading volumes dropped 4% sequentially and 19% year-over-year. The story is similar with fixed income, though the trends are rather muddled with weaknesses in rates and FX, according to the report.

The good news is that while volumes are down, market volatility remains rather strong. Volatility in April was up 39% compared to a year ago, suggesting the second quarter will belong to banks who can make the most of volatility when volumes are low.

Goldman Sachs typically thrives during periods of volatility. However, CFO Martin Chavez said last month that client performance is the key driver of trading revenues, not unsustainable seasonal factors like market volatility. Morgan Stanley CEO James Gorman appeared to disagree, suggesting that a seasonal increase in volatility was the main reason for the wild uptick in trading revenues during the first quarter.

The potential downturn in equities revenues in the second quarter comes as banks are staffing up their equities teams. It also comes as U.S. pay consulting firm Johnson Associates is predicting a 10% to 15% increase in equities bonuses this year compared to last. But the latest report from Buckingham Research suggests that may be an overeager premonition.

Meanwhile, the report suggests that M&A may lead the charge during Q2. While fees were actually down during April, there has been a deluge of announcements and activity during the last few weeks that is setting the stage for a rather huge quarter. Just as markets divisions were looking strong, IBD bankers are fighting back.

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AUTHORBeecher Tuttle US Editor

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