The Plague of Low Trading Volumes in 2012

Every few months at sell-side firms, management host gatherings where they update employees on the current business environment and how their firms (along with competitors) are doing. A common phrase for this is "townhall", where a short presentation is given followed be a general Q&A. We just had ours a few weeks ago and thought I'd share my takeaways.

One of the biggest themes in 2012 so far is the extremely low amount of trading volume across the world, even in Asia where it is a growth market. Low trading volume is a big pain point for the sell-side, as it means lower commissions made off trades, a bad environment to launch deals, ultimately leading to a decrease in revenues for an IB.

In Asia, average revenue is down ~15-20% for the equities business across all IBs, and it's already July. It's even worse for new entrants that don't even have a platform, and are struggling to build one from scratch let alone any market share to drive commissions.

August is a seasonally slow month as many buy-side clients (and sell-side staff) take time off for vacation. Even if September, October, and November hit it out of the park in volumes, its unlikely to make up for the sharp declines earlier this year.

Headcount is the biggest expense for all banks, and their most effective way to maintain a reasonable cost-income ratio (and decent bonus pool) in the short term is to reduce staff. You'll be seeing this in the next couple of months and most firms have initiated headcount freezes (no hiring of non-critical staff), if not soon.

The good news is that sell-side firms usually over-fire during cyclical lows, only to rehire staff when things come back.

General consensus is that its definitely nowhere like 2008, but nobody expected volumes to drop this bad for such an extended amount of time.

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Comments (2)

Jul 20, 2012 - 1:16pm

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