Boom times have returned on Wall Street, at least for one trading desk.
Goldman Sachs made $200 million in profit on a single day this February as calm in stock markets was shattered with a historic surge in volatility, according to people with knowledge of the move. That's on par with what the firm's derivatives unit typically makes in an entire year, said the people.
The investment bank had positioned itself to benefit if the Cboe Volatility Index, the product sometimes called the "fear index" because it reflects expectations of future volatility, climbed, said the people, who declined to be identified speaking about internal matters. After months of tranquil markets, on Feb. 5 the VIX surged 116 percent, the biggest one-day move on record, as the S&P 500 plunged 4.1 percent and the Dow Jones industrial average dropped more than 1,100 points.
As a result, Goldman's hedge fund and asset management clients clamored for VIX exposure on the chance it would climb further, and the New York-based bank's positions were suddenly highly profitable.
It was a boon for Goldman's flow derivatives group, run by managing director David Casner, who joined in 2002. The business, a team within Goldman's larger equities division that trades securities like VIX options, had been stung in recent years by calm markets and regulation. During all of last year, the bank's entire trading business exceeded $100 million in revenue on just four days, the company said in February.
Driven by their recent performance and investments in trading technology that are starting to pay off, Goldman equities executives are optimistic they can regain the No. 1 ranking they have ceded to rival Morgan Stanley by year-end, according to the sources. J.P. Morgan Chase has also made gains against Goldman in recent years, a move that the investment bank's traders are eager to counter.
Goldman's volatility bet helped fuel the 38 percent increase in first-quarter equities trading revenue to $2.3 billion, exceeding the increase by Morgan Stanley and J.P. Morgan.
The firm is known for managing risks well, but such trading moves aren't without potential hazards. If the market had gone the other way, they were exposed to losses, similar to wrong-way bets in commodities that stung Goldman in 2017.
Perhaps with his recent equity performance in mind, Goldman CEO Lloyd Blankfein defended his bank's beleaguered trading business when he spoke at a conference later in February.
"I don't think it would be a good strategic move to forgo the upside in the business from here," Blankfein said.
A spokesperson for Goldman Sachs declined to comment.