If you’re looking for signs of economic recovery from big banks, you’re out of luck. The financial sector is once again hemorrhaging jobs, and now it’s the trading floors that are looking deserted. Fixed income, currency, and commodity traders were laid off en masse over the past few weeks as division revenues declined.
While the overall economic picture is starting to look better — headline unemployment fell to 6.3 percent in May, comfortably within the Federal Reserve’s target — the picture is not so rosy for currency and fixed income traders.
According to Challenger, Gray & Christmas, a consulting firm that manages executive departures and management restructuring, financial companies cut 61,000 jobs in 2013 compared to 41,000 jobs in 2012, a 34 percent jump.
The leap may be shocking at first, but these cuts have been a long time coming. Big investment banks have been axing jobs on their trading floors, specifically on the fixed income, currencies, and commodities (FICC) desk for the simple reason that there are too many of them and they aren’t bringing in enough trading profits. Banks have waited long enough to see if the markets improve and volatility resumes as trading profits thinned.
Per Coalition, a research firm, trading revenues from the top 10 global investment banks have dropped from $31.6 billion in the first quarter of 2012 to $22 billion in the first quarter of 2014, a fall of 30 percent in two years. In comparison, the numbers of employees on the trading desks have shrunk 15 percent, to 18,702 from 21,962 employees.
On Tuesday, The Wall Street Journal reported that Morgan Stanley (NYSE:MS) is the latest among investment banks to announce job cuts from its currency and fixed income trading businesses. According to CEO James Gorman, this is in response to slowdown in the markets. The Wall Street Journal also reported that Deutsche Bank (NYSE:DB) cut its FICC staff by 17 percent between 2011 and 2013. Barclays (NYSE:BCS) earlier this week announced its plan to cut 7,000 jobs in the next three years, and Royal Bank of Scotland (NYSE:RBS) is also set to let go of traders on the trading floor.
When the economy is doing well, businesses prosper and they tend to over-hire; when the going gets tougher, they prune jobs. But when it comes to giving pink slips to traders, it is more than just that.
In the last year and a half, regulators have tightened the leash on banks by increasing capital requirements. In December, financial regulators adopted the Volcker Rule, a provision in the Dodd-Frank Act that curbs excessive risk-taking in the garb of hedging. Banks now keep aside more capital to absorb trading losses. Ironically, trading is all about taking risks and profits on currency, and fixed income trading comes from taking bets on how prices move on bonds or currencies from one second to another.
The fun of the game is also how volatile the movements in the price of bonds and currencies are. In a market where interest rates have been largely held steady and have been moving unilaterally, the market volatility that creates room for traders to make profits is low.