Dollars and Jens
Wednesday, May 12, 2010
big trading houses and liquidity
The New York Times reports that
Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day.
Even before reading much deeper, I had suspected this:
Risk management experts said the four banks, as well as other Wall Street players, reaped big rewards without necessarily placing big bets that stocks or bonds would go up or down. Instead, they mostly played matchmaker, profiting from the difference between the prices at which clients were willing to buy and sell. Banks said that customer order flows were particularly strong during the period.
Since the beginning of 2009, these companies have moved away from big market bets toward simply providing liquidity to clients on comparatively simple products. A lot of players left the market or scaled back their presence, either because they failed or because they can't bring as much capital to the table, because of losses, prudent deleveraging, or some combination of the two. It may be a while before enough competition returns to the sell-side to bring this down in a serious way; in the meantime, the juicy profits should remain there, gradually drawing it back in.

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