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 8 hours ago
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

8 hours ago
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!
6 hours ago
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.
7 hours ago
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.
7 hours ago
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.
7 hours ago
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.  
6 hours ago

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

6 hours ago
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 ?
7 hours ago
Nobody wants to play your game anymore, waawaa!
7 hours ago
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.

7 hours ago
WRONG MSN!!!!!!!!!                  WHAT USED TO BE THE U.S.A. IS IN DEEP TROUBLE!!!!!!!!!

 "How fortunate for governments that the people they administer don't think."
                                                                                                   ~~Adolf Hitler
6 hours ago

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.

7 hours ago
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?
7 hours ago
 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!!!
7 hours ago
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....
6 hours ago
7 hours ago

                          .......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"



7 hours ago
No President has been a better friend to the large corporations and the Wall Streeter than barry2xer has. In the last 6 years they are rolling in cash. And all you who voted for hope and change, have seen gas prices double, food prices on the rise, and you home dropping everyday. Sad isn't it?
7 hours ago
funny because I'm making a ton of money right now.
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