"Making Sense of Wall Street’s Trading Revenue"

 From DealBook:

Traders at the top Wall Street firms racked up nearly $80 billion of revenue last year. But understanding how they produced all that money is far from simple.

The financial crisis revealed the dangers of banks having murky balance sheets. And some investors think banks’ disclosures are still inadequate. “The major financial institutions in the U.S. and around the globe are utterly opaque,” Paul Singer, the founder of a large hedge fund called Elliott Management, said last year.

At a conference this week, Mr. Singer clashed with Jamie Dimon, chief executive of JPMorgan Chase, over the subject of bank transparency. In the exchange, Mr. Dimon said hedge funds were hardly transparent and added that JPMorgan’s annual report was 400 pages long.

Trading results are good place to start when assessing whether banks release sufficient information. 

At large banks, sales and trading is a major source of revenue, often dwarfing the fees that they earn from arranging deals or managing other people’s money. For instance, Goldman Sachs had sales and trading revenue of $18 billion last year, compared with $5 billion from activities like advising on mergers and handling initial public offerings.

Shareholders benefit from good disclosures because they can better assess what value to place on a bank’s business. Trading revenue is not only large – it can also be extremely volatile, bolstering profits one quarter, then hurting them the next. With the right data, investors can do a better job of identifying what drives revenue up and down.

Another dynamic effects trading these days: regulation. Revenue from trading could decline as new rules stamp out certain types of bets. Tougher capital rules could also make the trading that is allowed more costly for the banks....MORE