Wall Street trading is in deep trouble

Tighter regulations and the end of a lengthy bull market in bonds have changed the landscape forever.

By MSN Money Partner Jul 24, 2014 3:40PM
Credit: © Tetra Images/Getty Images

Caption: Empty trading desks with computers and phonesBy Howard Gold, MarketWatch

The signs are everywhere on Wall Street. Trading floors that once buzzed with noise and energy are now as silent as cathedrals. Big firms that reaped huge profits from trading stocks, bonds, commodities and currencies are turning to staid money management to boost earnings.

What once was the main event is now just a sideshow. 

There are many fewer traders now, and they're making much less money. And there are going to be even fewer very, very soon. With one big exception I'll discuss later, trading is dying.

And it's not just stock trading, where volumes are slightly more than half of what they were five years ago. Fixed income, currencies and commodities trading (FICC), Wall Street's huge profit driver of the 2000s, is in deep, deep trouble.

Bitter traders watching the gravy train leave the station blame regulators for tying Wall Street's hands or the Federal Reserve's unconventional monetary policy, which suppresses interest rate spreads and volatility that are traders' bread and butter. That's what's really behind former pit trader and CNBC commentator Rick Santelli's increasingly strident, desperate rants over the past few months.

And the so-called "debate" in the financial media about whether this decline is cyclical or permanent is completely phony. It's not coming back, guys, so maybe you should learn a useful trade like being a plumber or electrician. I'm serious.

Problem is, tighter regulation stemming from the 2010 Dodd-Frank Act, the Fed's zero interest rates and extraordinary bond-buying, and the end of a three-decade-long bull market in bonds have changed the landscape forever.

As of 2013, FICC trading on Wall Street plunged 23 percent from 2010, The Wall Street Journal reported. And although second-quarter trading revenues were not down as much as some firms had projected, they're still deteriorating. At Morgan Stanley (MS), which is leading the retreat from trading, FICC trading revenues have plummeted 60 percent from 2006, based on data in a study by Freeman Consulting.

"Essentially, the execution businesses are in deep trouble -- and fixed income is in the worst shape," said Brad Hintz, veteran analyst at Sanford Bernstein & Co., who is retiring to teach at New York University's Stern School of Business.

"ROEs (return on equity) in trading . . . have been cut in half," Hintz told me. And the cuts Wall Street firms have made so far don't "solve the fundamental problem. The trading businesses on their own are not beating their cost of capital."

In other words, Wall Street trading desks aren't pulling their weight. That will ultimately translate into even fewer bodies on trading floors.

Richard Stein, a partner in the executive search firm Caldwell Partners, sees this firsthand in his practice.

"Wall Street was sailing along for 16-17 years prior to 2007-2008 until the Titanic hit the iceberg," he told me. "These trading operations really were the main drivers of profits and leadership [at these firms]."

Several firms are scrambling to restructure and reorganize their businesses, he said, but it’s a losing battle. Trading's downward spiral is showing up in traders’ paychecks -- and in the pink slips that are sure to follow.

"If you're a trader on Wall Street, you're making two-thirds less than you used to, and the Sword of Damocles is hanging over you," Stein said.

Those with the biggest targets on their backs are the most highly paid. Managing directors (MDs) in trading who make $3 million to $5 million a year, Stein said, are "the most vulnerable." Hintz estimates that 40 percent of the compensation pool goes to MDs and above.

I don't feel sorry for them. Some of Wall Street's best traders already have jumped ship to hedge funds, which pay more and aren't burdened by as many regulations. And I suspect many of the rest have banked enough to get by in the lean years, of which there are going to be many ahead.

"This is Stage IV and there’s not much that can be done, because it’s irreversible," Stein told me.

"The world has permanently changed," Hintz said.

Unfortunately, while trading is dying on Wall Street, it's alive and well on Main Street. Average daily trading volume at E*Trade (ETFC), TD Ameritrade (AMTD) and Charles Schwab (SCHWrose by an average of 18.9 percent in this year's first quarter over the last three months of 2013, The Journal reported.

And TD Ameritrade reported 492,000 trades a day in the first quarter, a 77 percent jump over the third quarter in 2007, when the bull market of the 2000s peaked. What are these people thinking?

Far from seeing Wall Street's trading slump as a disaster, I'm enjoying it immensely. I always found most trading to be, at best, a useless activity that just shuffles money around without adding any value. The environment that has been so bad for traders has been wonderful for ordinary investors, so for once, professionals' misery is our gain.

The big changes are hitting traders where it hurts. According to WeddingCrunchers.com, the term "trader" now appears only a third as often in New York Times wedding announcements as it did in 1998. Apparently, traders aren't such good catches anymore.

Whatever happened to the Masters of the Universe in Tom Wolfe's great 1987 novel "Bonfire of the Vanities" or the Big Swinging You-Know-Whats from Michael Lewis' "Liar's Poker"?

How the mighty have fallen! If trading was a stock, I'd short it.

--Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.

More from MarketWatch

Jul 24, 2014 5:23PM
They are complaining because there's no one that has money for them to take anymore. They've already taken all the everyday joe's money.
Jul 24, 2014 4:03PM
I sure hope oil traders are part of this collapse.  They are the ones who drive oil prices up and keep them there.  I say piss on them!
Jul 24, 2014 4:45PM
Prohibit the big Banks and their trading companies and affiliates from trading in oil contracts and watch the price of oil go down.  Why are Banks trading in the futures market anyway, besides to make money and drive the cost of those items up to the consumer.
Jul 24, 2014 6:02PM

As it should be! making money for nothing, ruining investors life and savings. Hope there is a special place in Hell for those bastards!

Jul 24, 2014 5:35PM
Maybe customers (or marks if you prefer) are finally starting to realize that the only  people making any real money from trading are the brokers and trading companies ?
Jul 24, 2014 5:13PM
Without these regulations it will be 2008 all over again. Unfortunately these traders do not have the good of the country uppermost in their minds, they are only interested in driving up profits at any cost, and the more the better.  
Jul 24, 2014 4:34PM
Nobody wants to play your game anymore, waawaa!
Jul 24, 2014 4:46PM
It is time to restructure Wall ST and how investors buy/sell stocks.  The current system is fraudulent and lacks controls so those in control continue to manipulate the stocks so only they can benefit.  Wall ST needs a major enema along with those that work in the financial services area.  Too many people think they are financial advisors but they don't have a clue.  Make it a requirement that the only people allowed to work in the financial industry has a Master Degree in Finance, Economics etc from an accredited college and impose strict guidelines on how stocks, bonds and other financial instruments are traded.  It is time to look out for Main St and not Wall St and their cronies.
Jul 24, 2014 5:08PM
Markets should be about real-business needs to raising capital and reducing risk.  HFT and traders that made money on asymmetric information in the past need to be shut down now.

Now if Congress would work on Tax reform and making taxes simpler, we can also remove the high demand for tax attorneys and accountants.

Jul 24, 2014 5:38PM

I am glad to hear that!

The stock market is suppose to be the source of equity capital for public companies and means for people to redirect their investments to the most deserving companies.

The speculative nature of "trading stocks" as an occupation does not create anything of value except create daily winners and losers.

Jul 24, 2014 11:03PM
When Henry Ford  started his company he initiated very simple concept.  He figured that if he paid his workers a decent salary, they would be able to purchase the cars they manufactured.  He was content with a modest ROI.  To me, this was the beginning of the middle class in this country.  Company accountants now have the task to not look at their company as a part of a larger national and global entity, but to greedily milk as many financial returns as possible by cutting costs including workers.  To provide more ROI to investors, more and more people are losing jobs. Gee i haven't seen the "actual unemployment" rate in this country for quite awhile - but I imagine it is very high as many have just given up looking for work.  Now we have  billionaire, Carlos Slim and the techies at Google  telling us that U.S., workers should be happy with 2 to 3 day workweeks so we can enjoy more leisure time. While they live the lives of the ultra "nouveau riche", the expect others to live without the income to support this "leisure time.".  These concerned  greedsters are bringing in cheap labor from other countries so they can have larger ROIs which in turn adds to the overburdened government welfare and unemployment rolls. There is a new game  Who's the Richest?" This is a  little game the techies are playing between themselves.  Now Wall Street is concerned?  Really?  People without jobs cannot purchase very much. 
Jul 24, 2014 5:09PM
The "unexplainable" flash crash soured a lot of people on trading. Who in their right mind would set stops anymore in a market this rigged?
Jul 24, 2014 5:30PM
Jul 24, 2014 5:17PM
Jul 24, 2014 5:01PM
 Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."---

 True, we deserve better from ALL of Congress and ALL administrations. But if you sit there and play the game that they are using you as a pawn in, you are as guilty as they are... Don't you think our forefathers would say that!!!
Jul 24, 2014 8:27PM
And this is a bad thing? Go out and get a real job.
Jul 24, 2014 4:34PM
I'd guess a lot of money has flowed out of high-cost actively managed funds into low cost index funds, and that has reduced the need for fund managers and their infrastructure.  You can surely see this in the growth of Vanguard.

The market has been quite un-volatile lately - I doubt that's like to continue, though.  We'll see....
Jul 24, 2014 4:59PM

                          .......Wall Street is now in a Holding Pattern.....

            Please take your seats and place your trays in an upright position

                                       and secure all seatbelts

                                 "This Aircraft Is About To Land"



Jul 24, 2014 4:41PM
WRONG MSN!!!!!!!!!                  WHAT USED TO BE THE U.S.A. IS IN DEEP TROUBLE!!!!!!!!!

The world is a safer place.
AL Qaeda has been decimated.
I heard about it from a media report.
And - - as an American.
I'm mad as hell!!!!!!!!!!
I'm the President - - I can do whatever I want.
I will have the most transparent administration in history.
There is not a SMIDGEON of corruption in the IRS!!!!!
The stimulus will fund shovel-ready jobs.
I am focused like a laser on creating jobs.
The IRS is not targeting anyone.
It was a spontaneous riot about a movie.
If I had a son.....
I will put an end to the type of politics that "breeds division, conflict and cynicism".
You didn't build that!
I will restore trust in Government.
The Cambridge cops acted stupidly.
The public will have 5 days to look at every bill that lands on my desk
It's not my red line - it is the world's red line.
Whistle blowers will be protected in my administration.
We got back every dime we used to rescue the banks and auto companies, with interest. 
I am not spying on American citizens.
ObamaCare will be good for America 
You can keep your family doctor.
Premiums will be lowered by $2500.
If you like it, you can keep your current healthcare plan
It's just like shopping at Amazon
I knew nothing about "Fast and Furious" gun-running to Mexican drug cartels
I knew nothing about IRS targeting conservative groups
I knew nothing about what happened in Benghazi
I have never seen my Uncle from Kenya who is in the country illegally and that was arrested and told to leave the country over 20 years ago
And, I have never lived with that uncle. (He finally admitted today, [12-05-2013] that he DID know his uncle and that he DID live with him.)
And the biggest one of all:
"I, Barrack Hussein Obama, pledge to preserve, protect and defend the Constitution of the United States of America."

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

123 rated 1
262 rated 2
480 rated 3
651 rated 4
649 rated 5
629 rated 6
616 rated 7
496 rated 8
346 rated 9
111 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.