Goldman, Morgan Stanley and JPMorgan make the case for higher valuations by separating from the pack

Published Wed, Jan 20 20213:42 PM ESTUpdated Wed, Jan 20 20213:56 PM EST

Key Points

Banks just finished reporting results for the final three months of 2020, and the gap in lucrative trading fees earned at Wall Street's Big Three – JPMorgan Chase, Goldman Sachs and Morgan Stanley – and the rest of the world's capital markets players has never been bigger.
Executives and traders at the Big Three contend that these trends will continue, ultimately justifying higher valuations for the banks as they funnel more trading activity into their platforms, creating higher returns.

Even within Wall Street, there are haves and have-nots. Banks just finished reporting results for the final three months of 2020, and the gap in lucrative trading fees earned at Wall Street's Big Three – JPMorgan Chase , Goldman Sachs and Morgan Stanley – and the rest of the world's capital markets players has never been bigger. While the three biggest players racked up stock and bond-trading revenue that exceeded analysts' expectations by almost $1 billion combined in the quarter, driving earnings beats for the companies, others fared less well. Bank of America 's fixed-income traders produced $370 million less revenue than expected, for instance, and Citigroup 's bond traders essentially matched expectations. "There has been a consolidation of wallet share into the leading players across these platforms," Goldman Sachs CEO David Solomon said Tuesday on a conference call. "It is increasingly difficult to compete in these businesses unless you're global and at scale, unless you have the capacity to make very, very significant technology investments into platforms to better connect with your clients." Executives and traders at the Big Three contend that these trends will continue, ultimately justifying higher valuations for the banks as they funnel more trading activity into their platforms, creating higher returns. Hedge funds and other institutional investors are under pressure to shave expenses and conform to tougher regulations and have been winnowing lists of trading partners, industry sources say. Although this dynamic has been happening for most of the post-financial-crisis decade, there are signs it is accelerating as European firms face increasing pressure. Technological changes in the equities business, where more trading is being done on screens, is slowly making its way into the fixed income world, putting pressure on smaller players to either invest or pull out, as Deutsche Bank did in 2019. European firms including Deutsche Bank and Credit Suisse are scheduled to report fourth quarter results in coming weeks. "I would say this is loudly and as emphatically as I can, scale matters more than ever before in this business," said the head of a major bank's trading business who declined to be identified speaking frankly. "With each and every quarter, you see more of the global client wallet shift from the Europeans to the Americans." Furthermore, "when you get these periods where client volumes explode and volatility picks up, more of that falls to the bottom line because of that scale," he said. "It's a three-horse race in equities and changes are happening more profoundly now in fixed income." Goldman and Morgan Stanley have each been on the receiving end of questions about their commitment to trading during leaner years, when preternaturally calm markets led to subdued activity. In 2015, Morgan Stanley cut a quarter of its fixed income personnel. But under new trading leadership since then, the bank has consistently invested in its technology, global reach and presence with investors, said CFO Jon Pruzan. "You are seeing the consolidation of market share among the top players, which is a trend you've seen across many other industries," Pruzan said Wednesday in a phone chat. "I do think you'll continue to see market share shift to the biggest and most consistent players."

Charging Bull Statue is seen at the Financial District as snowfall in New York City, United States on December 16, 2020.

Tayfun Coskun | Anadolu Agency | Getty Images

Even within Wall Street, there are haves and have-nots.

Banks just finished reporting results for the final three months of 2020, and the gap in lucrative trading fees earned at Wall Street's Big Three – JPMorgan Chase, Goldman Sachs and Morgan Stanley – and the rest of the world's capital markets players has never been bigger.

While the three biggest players racked up stock and bond-trading revenue that exceeded analysts' expectations by almost $1 billion combined in the quarter, driving earnings beats for the companies, others fared less well. Bank of America's fixed-income traders produced $370 million less revenue than expected, for instance, and Citigroup's bond traders essentially matched expectations.