The nation's three biggest banks -- JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C) -- said last week that trading revenues will be down in the third quarter, which ends on Sept. 30. This shouldn't come as a surprise to investors, as trading is as much as 10 times more volatile on a year-over-year basis compared to other common business lines at banks.
- Bank of America's CEO Brian Moynihan announced on Thursday that its trading revenue is likely to fall by 5% to 6%.
- Citigroup CFO John Gerspach forecast a 5% drop.
- JPMorgan Chase CEO Jamie Dimon acknowledged that its estimates are running "about the same as everybody else."
All three of these banks generate a substantial amount of revenue from trading. Over the first six months of 2015, JPMorgan Chase earned $6.5 billion from it, compared to $4.7 billion and $3.9 billion at Citigroup and Bank of America, respectively.
At the same time, however, volatility is the name of the game when it comes to trading. You can see this in the chart below, which compares JPMorgan Chase's quarterly revenue from three of its major business lines: trading, investment banking, and asset management.
While revenues from investment banking and asset management do fluctuate, they do so less violently than trading. On a year-over-year basis, JPMorgan Chase's quarterly trading revenues have fluctuated by a median of 35.9% since the beginning of 2006. Meanwhile, quarterly fluctuations in its asset management and investment banking businesses have swung by medians of only 6.3% and 4.5%, respectively.
Another way to look at this is through the standard deviation, which is used to show how dispersed a particular dataset is around its average -- a bigger standard deviation translates into wider dispersion and vice versa. In JPMorgan Chase's case, the standard deviation associated with its quarterly trading revenue over the last decade is 2,288, which is upwards of 10 times the standard deviation of its quarterly asset management and investment banking operations.
This, combined with the fact that JPMorgan Chase has the largest trading operations of the nation's biggest commercial banks, goes a long way toward explaining why its shares trade for a discount relative to, say, Wells Fargo, a more traditional bank that earns only a tiny fraction of its income from trading. It also illustrates why investors shouldn't be surprised when a bank's trading revenues are either substantially higher or lower on a year-over-year basis. As the chart above shows, that's just how trading works.