The persistent lack of cross-asset volatility was the gift that kept on giving for the legions of traders both large and small who in 2017 conspired to make the entire market one giant, global bet on suppressed vol.
As Citi put it late last year, “trades and strategies which explicitly or implicitly rely on the low-vol environment continuing, are becoming more and more ubiquitous.”
That applied pretty much across the board – i.e. from sophisticated traders and fund managers all the way down to the Seth Goldens of the world, shorting the VIX from their living room. Here’s how Deutsche Bank’s Aleksandar Kocic described the shrinking number of options available to investors in late January, on the eve of “Vol-pocalypse”:
The markets have gradually surrendered to the ever shrinking menu of selections that converged to a binary option of either harvesting the carry or running a risk of gradually going out of business by resisting. Not much of a choice, really. In this process, Central banks have reached a point of enormous power and control where market dissent is practically impossible. We believe that such levels of market control remain uncontested with anything we have seen in recent history and that the markets’ dynamics have never been further from that of the free-markets. Low volatility is a perfect testimony of that.
But while this regime was ideal for those who resigned themselves to their fate and joined the crowd in betting on a continuation of the existing order (perpetuated as it was by the ongoing communication loop between central banks and markets and the persistence of the “Goldilocks” narrative of synchronous global growth and still-subdued inflation), it wasn’t great for banks’ trading revenues.
Given the triumphant return of volatility (especially in equities) in Q1, folks were keen to get a read on the equities businesses at JPMorgan and Citi on Friday morning and guess what? “Bigly”, that’s what.
Equities trading contributed $2.02 billion to JPMorgan’s record results – that marked a 26% increase and blew away estimates.
Meanwhile, at Citi, it was the same story. Equities trading revenue at the bank surged 38% to $1.1 billion in Q1, that’s the most since 2010 and also well ahead of estimates.
There you go. At least Trump’s tweets and harrowing bouts of systematic de-risking by robots is good for something: driving up volatility and dragging trading revenues out of the gutter for the world’s most important financial institutions.
Of course this is something of a double-edged sword. On one hand, higher volatility means higher turnover and more hedging and just generally wakes people up, but if the shit gets too crazy, people might just take their ball and go home. Or worse, leave banks sitting on positions they didn’t properly hedge and have to unload into a fire sale.
But hey, try to look at the bright side, will you? It’s Friday after all.