Three years ago there was outrage among traders when HFT marketmaker Virtu reported that it had managed to log just one day of trading losses in over 4 years of trading. Many speculated that this was proof that HFTs had managed to effectively rig the market in a way that prevents any trading losses. It now appears that Virtu is not the only one with a near-perfect trading record.
Over the past several years, America's big banks have been loathe to publicly disclose how effective their trading desks are, and as a result several years ago they changed they way they report their "trading losses", usually adjusting for VaR and market-risk. A quick look at JPM's most recent 10-K reveals just that. According to disclosure in JPM MD&A, a reader would be left with the impression that JPM's trading desk is mediocre at best, as a result of the following disclosure:
The following chart compares the daily market risk-related gains and losses with the Firm’s Risk Management VaR for the year ended December 31, 2016. As the chart presents market risk-related gains and losses related to those positions included in the Firm’s Risk Management VaR, the results in the table below differ from the results of back-testing disclosed in the Market Risk section of the Firm’s Basel III Pillar 3 Regulatory Capital Disclosures reports, which are based on Regulatory VaR applied to covered positions. The chart shows that for the year ended December 31, 2016 the Firm observed 5 VaR back-testing exceptions and posted Market-risk related gains on 151 of the 260 days in this period.
Naturally, any time banks purposefully "adjust" or otherwise obfuscate a number, it usually means that the actual, unadjusted number reveals a very different picture, and not surprisingly, the same is true regarding JPM's trading record. Conveniently, during JPM's investor day yesterday, JPM Investment Bank CEO Daniel Pinto presented a 25 page breakdown which among other things, contained the answer.
According to the following chart on page 12, not only did JPM not have a single losing day in all of 2016, but JPM's trading desk also had zero daily losses in 2014 and 2013. It did, however, lose money on two days in 2015. Prior to that one needs to go all the way to 2012 to find 7 days in which the largest US bank by market cap posted any losses.
The other notable observation: JPM generated on average $80 million in daily trading revenues in 2016, up from $70 million the year before. In fact, 2016's average daily profit were the highest in the past 5 years. Putting the firm's market revenues in context, JPMorgan generated around $21 billion in fixed income and equity sales and trading revenues in 2016, in a year in which volatility - aside from two notable episodes - was largely absent.
The jump in daily markets revenue was the result of increased revenue across virtually every JPM business line. As shown above, flow market-making revenues increased 21% from 2014 to 2016, while financing-related revenues increased 24%.
Meanwhile, in his presentation, Pinto said that the bank spends a lot of time discussing the appropriate level of risk it should run.
"We need to take the amount of risk necessary to provide liquidity in any kind of market conditions," he said. "If we try to be smarter and take a punt to drive excess profitability, we will find ourselves in a bad place."
Then again, looking at the numbers above, one wonders "what risk?"