Link Between Underwriting and Trading Is Put to the Test

Wall Street is putting a trading axiom to the test. Investment banks often say that underwriting debt and equity issues for companies brings in trading activity, and vice versa. The latest results from the country’s five big players — Bank of America, Citigroup, Goldman Sachs, JPMorgan and Morgan Stanley — show that that’s not necessarily the case.

Goldman, which reported earnings on Wednesday, has over the past five years done a fine job bulking up the business of helping companies issue debt. The division raked in just shy of $3 billion last year, a 24 percent increase over 2013.

Its traders, though, have not been as successful. A 38 percent drop in fixed-income, currency and commodity trading revenue over the same five-year period made Goldman the worst performer of the five banks. On average, the five endured an 11.4 percent decline.

Trading revenue at Citigroup and JPMorgan declined too, albeit by a smaller percent, even as underwriting grew. Bank of America managed a slight increase in trading despite a small drop in underwriting.

Morgan Stanley is the only one of the five to grow both businesses. Its fixed-income, currency and commodity trading revenue has jumped 37 percent since 2013 to just short of $5 billion. That has come with an almost 10 percent increase in selling new debt.

It’s not that trading doesn’t benefit from underwriting, or the other way around. But resting on one’s laurels is not a winning strategy. Morgan Stanley’s trading success results from the firm being willing to implement a major overhaul of the business. It ditched much of its commodities business — a unit now causing headaches for Goldman. It also, in 2015, slashed a quarter of its division’s staff as part of honing its offering to both companies and investors.

Goldman, which historically relied more on hedge funds than its peers for trading revenue, reckons its market-leading merger advisory franchise can be a big driver. So far, that has not helped, either. Morgan Stanley’s lesson is one Goldman’s chief executive, Lloyd Blankfein, would be well advised to take to heart.