OK, I have heard all the explanations, spreads are wider because there are fewer market makers, asset prices are rallying (market making firms are structurally long; it’s difficult and costly to go net short on that big a balance sheet), Goldman is currently the trading kingpin.
But I still find these factoids remarkable: Goldman lost money trading only one day last quarter and only two days the prior quarter.
Now maybe I am just hopelessly out of touch, or perhaps more accurately, the Fed has created such a ridiculously favorable environment for banks and traders that if you are moderately competent, making money is like shooting fish in a barrel. But a winning streak this consistent looks like a rigged game. Is this just, ahem, “information advantages”? Greater ease in pushing markets around that have fewer players? Just a function of those monstrously wide bid-asked spreads? I’m curious for a sanity check from people closer to the action.
The party line comes in the Financial Times:
The performance – revealed on Wednesday in a regulatory filing – compares with two losing trading days in the previous quarter and confirms that the authorities’ drive to revive markets after the crisis is yielding huge windfalls for some banks.
Before the crisis, banks regularly recorded trading losses on several days in a quarter.
Goldman made more than $100m in profits on 36 of the 65 days in the three months to September and recorded more than $50m in profit on more than eight out of 10 trading days, the filing shows.
These figures were down from the second quarter, when Goldman reported record trading revenues and had 46 days with $100m-plus in profits. The smaller number of days with $100m-plus profits in the third quarter partly reflects the bank’s decision to rein in risk-taking in areas such as interest rates and equities.
There is a suggestion here that banks like Goldman might be taking advantage of the Fed and Treasury (although that might be by design, yet another hidden subsidy), as has been intimated elsewhere:
Dealers say banks have made big profits by the timing of Fed purchases of government debt and subsequent Treasury debt sales, and by betting that the relationship between Treasury bonds and other fixed-income securities would normalise.