JPMorgan traders made big profits where French banks made big losses

The first day of a new quarter is the traditional time for asking your colleagues and competitors how they think they did.  Not just for bragging rights, but it’s useful information to benchmark your bonus expectations and think about whether you might be able to move to a more profitable trading desk.  Early indications appear to be that JP Morgan’s flow volatility team are still standing proud, according to “sources” speaking to Business Insider.

The numbers are not easy to be sure of, as JPM doesn’t break out the volatility products in its official disclosures, but the BI “source” is talking about $1.3bn of equity derivatives revenue for Q2 20, which would be a strong follow through from Q1, when even more ideal conditions delivered $1.5bn, and would represent a run rate still roughly double that of a normal year.  Within that, the sources are talking about the global flow volatility traders having generated roughly half the equity derivatives revenue, and three times their performance in the whole of 2019.

Numbers like these have to be taken with a pinch of salt; people don’t always see the full picture, and the allocation of revenues between cash, derivatives, volatility and hedging trades is always a matter of art (and office politics) as much as science.  But the general shape of things is usually pretty easy to make out, and it’s unlikely that the JPM people would be saying things like “there isn’t a runner up within $100m” to Business Insider if they thought they could be contradicted.

Where did these profits come from? Derivatives trading is often close to a zero sum game, and the biggest story of Q1 was the wipeout at SocGen and (to an only slightly lesser extent) BNP Paribas.  JPMorgan's traders have done well out of elevated volatility and huge trading volumes, but French banks have not.  SocGen and BNP enjoy their global leadership in equity derivatives in normal years because of their franchise in structured products and these are mainly sold to protect clients from volatility.  They’re writing the financial equivalent of hurricane insurance, so stormy conditions hurt them as much as they help flow-oriented desks.

If JPMorgan's equity derivative traders have had an excellent Q2, does this imply that the French banks have has a correspondingly challenging three months? Not necessarily. It’s unlikely that Q2 will have been as bad for the French banks as Q1.  The real damage last quarter was done when companies started suddenly cancelling dividends.  And risk management has stepped in, reducing capital allocations.  But SocGen has announced early last month that it would be looking at further cost cuts, suggesting that things were far from back to normal.  The JP Morgan traders might be well advised to avoid celebrating excessively, particularly in their Paris office now the bars are reopening.  You never know who’s listening, and not everyone in the derivatives industry is in such a good mood.

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