Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Wall Street: The Gang That Couldn't Trade Straight

Wall Street sign
Paul Giamou | Aurora | Getty Images

It's official: The third quarter of 2011 was one of the most brutal on record for traders at Wall Street's biggest firms.

Almost across the board, the firms made less money trading stocks and bonds than they had earlier this year. JPMorgan Chase saw its trading revenue fall by 28 percent from the previous quarter. Citigroup saw trading revenue fall by 30 percent. Bank of America saw a breathtaking 71 percent decline in trading revenues.

Goldman Sachs was an exception. It doesn't even use the word "trading" in its release. But in the category that most other firms call "sales and trading," Goldman saw a gain of 16 percent.

Despite the lackluster trading revenue, the results for big banks seem to be far less awful than many feared.

Citigroup, Bank of America and JP Morgan all reported quarterly profits that beat analyst forecasts. A sizable portion of these profits, however, came from adjustments to the value of their debt. When the debt owed by banks declines in value, banks can record this as a gain since they could theoretically buy back their own debt at a discount. Many investors prefer to look at the numbers without these adjustments, however.

Goldman is an exception here as well. It attempts to hedge against volatility in its own debt by trading in a basket of the debt of similar firms. This decreases its exposure to certain kinds of credit risk but also means that it doesn't see big paper gains when its debt declines.

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