Morning Coffee: Unexpectedly happy end of the year for traders. Talking on your cell phone causes trouble at UBS

The winter solstice is only ten days away, and it seems that the darkest days might be coming to an end for sales and trading teams too.  JP Morgan has revised its revenue guidance from “up” to “meaningfully up”, with fixed income particularly strong, but equities trading revenues also doing better than they were a month ago.  Deutsche Bank has also been giving a more favourable outlook for employment and confirming that fixed income trading revenue is up significantly on where it was a year ago.

This is good news.  Albeit that the fourth quarter has a very easy base for comparison – Q4 of 2018 was appalling – the trend seems to be moving in the right direction.  If Deutsche have been seeing the same trend as JP Morgan, this isn’t just the phenomenon we saw in Q3, where some houses did well by taking market share from troubled competitors.  Despite the persistence of “political uncertainty”, “investor risk aversion”, “poor volatility environment” and all the other reasons and excuses that have been raised over the last couple of years, things seem to have stopped getting worse.

What might be going on here is that it sometimes makes sense to think of sales and trading revenue as consisting of two separate pools.  There’s the revenue that’s based on transactions people carry out because they want to do something – to take a specific view, get something into their portfolio or do a deal.  And there’s the revenue based on things that investors have to do whether they want to or not, because they have pension contributions to invest, maturing bonds to refinance or foreign earnings to repatriate.  When revenues fall, it’s usually because the first, discretionary category has been squeezed.  But after a while, you get down to something close to bedrock.  And once the revenue pool consists almost entirely of non-discretionary trades, it only takes a little positive fluctuation to get things going.

Furthermore, in plenty of segments of the trading market, the long cycle of declining margins has begun to flatten out, if not exactly to reverse.  Marginal players – and even some major incumbents – have been shaken out, reducing some of the structural overcapacity.  And this means that the overall weak environment for trading volumes doesn’t have to be superimposed on a constant downward trend in pricing.

And that holds out reasonable prospects for jobs in bank's markets divisions too.  After years of staff cuts, trading desks are close to right-sized for the worst case scenario.  The round of pre-bonus reductions will take place, and the stabilisation in trading revenues has probably come too late to save the 2019 pool, but it’s possible to see a scenario in which a strong start to 2020 could leave a number of banks caught short-staffed for the amount of client orders coming in.  If that means that they have to go out into the market and hire back some of the people that they cut, we could see upward pressure on compensation for the first time in a very long time.  Of course, that 2020 rally is by no means certain, but there’s some room for hope.  Winter can’t last forever.

Elsewhere, the UBS crackdown on internal rules has claimed another high-profile victim.  After Jim Boland was fired for allegedly changing a bond deal to a syndicated loan deal without going through the proper committees, Barry Zamore has now been terminated as head of loan trading over allegations that he cancelled a loan trade with an investor but made a side-agreement to repurchase the same loan at the same price.  Mr Zamore’s lawyer is denying the allegations, calling them “false and defamatory” and saying that the trade was approved and the purchase and sale prices weren’t the same.

It’s not completely clear which side is correct here, but that’s precisely the problem.  Mr Zamore is accused of having called up the investor (a former colleague from his previous career at UBS) on his cell phone to arrange the deal.  Which would mean that there would not necessarily be any automatic recording to establish what did or didn’t happen.  It’s worth remembering that the recorded lines on a dealing floor are there to protect the innocent as much as to trap wrongdoers.

Meanwhile …

It’s all about the … investment process?  Ray Dalio is mentoring Sean “P Diddy” Coombs, the former rapper turned entrepreneur.  Since Coombs used to be famous for insisting on doing all the production for his label’s artists, rapping on the records and appearing in the videos, the advice given on delegation in the clip Dalio posted to social media might be well taken. (Bloomberg)

As the Wall Street banks chase middle-market deals in the MidWest, Stifel Financial (the pride of St Louis) has expanded its international operations, with a new office in Tel Aviv. (Reuters)

Congratulations to the 137 new Managing Directors promoted at Citigroup in the investment banking, wealth management and corporate banking divisions. (Financial News)

With only a short while until election day in the UK, here are some profiles of former investment bankers standing for election.  Apparently Chris Barclays, the UK’s Brexit Secretary, did once work in compliance at Barclays. (Financial News)

Grenoble Business School has launched a data analytics course specially targeted at people with Asperger’s Syndrome (FT)

Lloyd Blankfein continues to chase his Netflix comedy special, with a joke about the posh name (“Willoughby Capital”) of Danny Och’s new family office (Bloomberg)

Noncompete agreements are becoming ubiquitous in financial services. (Institutional Investor)

Goldman Sachs is extending a partnership agreement with QC Ware, the quantum computing startup.  One of the applications where everyone sees promise for quantum computing is to make Monte Carlo analysis much faster for options pricing. (WSJ)

Employment lawyers are beginning to use big data – from payrolls, phone records and even security pass swipes – to build cases in equal pay claims. (FT)

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