JPM seeks to strengthen top trading position in volatile markets

The extreme volatility gripping financial markets has proved to be a mixed bag for banks this year. Corporate financiers struggled amid a trading drought, while trading desks thrived as investors shuffled positions.

In this goldmine of sales and exchanges, now in its third year, JP Morgan is on track to match its record of nearly $30 billion in annual market revenues recorded in 2020. This will solidify its place as the preeminent bank in global markets, a position it has held for more than a decade after resisting the 2008 financial crisis better than its peers and vindicate its decision to maintain a strengthened trading unit during the leaner period leading up to the pandemic.

But staying atop the pack looks set to become more difficult than ever in the years to come, as US rivals along with a group of resurgent European banks battle it out for a larger chunk of the revenue pool. The likes of Goldman Sachs, Morgan Stanley and Barclays have grown at an even faster pace in this high-volatility environment, underlining the difficulties of maintaining an edge.

“Competition has never been tougher,” JP Morgan’s head of global sales and research Marc Badrichani told IFR in an interview at the bank’s Canary Wharf office in London.

“Our goal has always been to stay close to large financial institutions so that we can be their bank of choice and benefit from their growth. We believe that by doing this and being well positioned to capture certain trends in the markets, such as the growth of private assets, we will strengthen our leading position.”

Market share

The previous decade saw US banks increase their market share in sales and trading as many European firms such as UBS and RBS/NatWest retreated. This helped cushion declines in sector-wide market revenues for US lenders, as the prolonged era of low interest rates depressed volatility and trading volumes.

But the market landscape has changed tremendously in recent years, bringing trading desks to the fore again. Asset prices have been much more volatile since the pandemic, prompting a flurry of customer activity and providing a tailwind for the handful of banks determined to expand their commercial divisions.

JP Morgan still leads the way with $23.3 billion in trading revenue in the first nine months of the year, a 46% increase over the same period in 2019, the last pre-pandemic year (and 5% compared to 2021). This has seen revenues grow at a faster pace than Citigroup and Bank of America, but slower than the likes of Goldman, Morgan Stanley, Barclays, BNP Paribas and Deutsche Bank.

Goldman has been the star of this period, roughly doubling its trading revenue to $20.5 billion so far in 2022 compared to 2019 levels. Observers suggest that rising appetite for risk (particularly in income fixed) was partly responsible for the upward thrust of these rivals.

So is JP Morgan missing a trick by not further increasing commercial revenues?

“You can always do better,” Badrichani said, highlighting some areas JP Morgan has invested in. One of them is the electronic trading of corporate bonds, which has taken off in recent years.

“We want to be top three across all products,” he said. “There are times when you have some areas of weakness and you need to double down on those areas and fix them.”

One area where JP Morgan has made significant progress in recent years is equity trading, where it is now toe-to-toe with Morgan Stanley and Goldman. And what about trading in physical commodities, an area that many banks have exited, but which has been hugely profitable for those like Goldman who remain in a year dominated by swings in natural resource prices? JP Morgan is prominent in metals trading but has a reduced presence in other markets after selling its physical business to Mercuria in 2014.

“We didn’t like the risk-reward of many of these deals,” Badrichani said. “We are investing in new markets such as renewables and at some point I think there will be an efficient carbon credit market. But we’re not going to change our energy footprint just because energy is hot right now. Some of our competitors may have had a more profitable business mix this year, but our primary focus remains to serve our customers.”

A neat fix

The collapse in bond and stock price competition marked 2022 as a watershed year for financial markets, as central banks aggressively raised interest rates to tame inflation. The ability of banks to thrive in this environment is in stark contrast to the 2008 financial crisis, when many were on the verge of collapse.

“Every time central banks tighten, it will create some stress in the system somewhere. But other than the LDI situation in the UK, the market has corrected without major dislocations – it’s been quite orderly,” he said, referring to liability-based investment strategies that led to a sell-off in Gilts by UK pension funds which prompted the Bank of England to intervene.

So what are the biggest risk markets today?

“The China-US relationship, because you have these two superpowers with tensions building up between them, almost more by accident than design,” he said. “This is the biggest risk in the system because it’s a risk to the globalization model.”

More specifically for banks, the last couple of years have been a reminder of the potential for leveraged investors to explode following wild swings in the financial markets. This includes the collapse of Archegos Capital Management last year, which resulted in some $10 billion in losses on its banks (a saga avoided by JP Morgan), while recent UK pension fund fireworks have provided another good example.

Badrichani said there is no perfect solution to protect against these scenarios. Instead, he said banks’ appetite for risk should be dictated by the amount of visibility they have about a client’s overall position.

“Liquidity is always at the heart of what could go wrong,” Badrichani said. “Properly managing liquidity and concentration risk is the lesson to be learned.”

Keep busy

Half Lebanese and half French, Badrichani joined JP Morgan in 2005 and worked his way up to the bank’s operating committee. Along with global markets head Troy Rohrbaugh, he oversees the bank’s sales and trading strategy under investment bank head (and JP Morgan chairman) Daniel Pinto.

Inevitably he spends a lot of time thinking about what makes customers tick. This equates to more than just delivering solid trade execution, with Badrichani also emphasizing the importance of serving clients both before and after completing a transaction.

“Post-negotiation is as important as the trade itself: ensuring that everything goes smoothly after a client has negotiated with you,” Badrichani said. “The number one reason Amazon is so successful is because their post-trade is brilliant: you push a button to order something and it arrives tomorrow.”

Among other things on the “pre-trade” side of the ledger, Badrichani said JP Morgan has overhauled its research offering, even questioning newspaper executives about how they keep readers’ attention as the world moves online.

“You can have the best content in the world, but if it’s in the wrong format, people won’t read it,” he said. “The pre-shop is essential. The more we are able to personalize that content, the more connectivity we will have with you and know what business ideas you are interested in.”

As for the general mood among customers right now, Badrichani said it was “pretty gloomy.”

“Clients aren’t sure what probability to put on a string of outcomes from Russia’s war in Ukraine and any deterioration in China-US relations. Every client we meet is focused on these two topics,” she said.

And finally, what about cryptocurrencies? Jamie Dimon has famously labeled bitcoin as “worthless,” but behind the scenes banks like JP Morgan have gradually been preparing for increased institutional demand for trading in the cryptocurrency markets (while also exploring the uses of blockchain technology). Does the Current Cryptocurrency Crash Mark the End of Institutional Interest?

“Everyone is looking at space. You have a couple of hedge funds that have been very active, but it’s still too volatile for most institutional accounts,” he said. “They’ll feel more comfortable when it’s regulated, and that will happen. It’s only a matter of time. “.

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RAPID FIRE Questions and answers

Office or work from home? Office.

Sale or exchange? I’ve spent my life in sales.

Human or machine traders? Humans.

Invest in fixed income or stocks? fixed income.

Hard or soft landing? bump.

Bullish or bearish? Constructively bullish.

US or Europe? To work: US. Living: Europe.

what keeps you up at night? Apart from my children? The geopolitical situation in the world.

Will France win the World Cup? We have better chances to win rugby world cup than soccer world cup. Maybe this time it’s really about ‘going home’ and winning England.

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