Goldman Traders Are Making Way Less Than They Used To

By Akane Otani and Joe Weisenthal January 16, 2015

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Photographer: JB Reed/Bloomberg News

Goldman Sachs’s headquarters in New York

The glory days may be over for Wall Street traders. Goldman Sachs just reported its lowest annual trading revenue since 2005. The bank made $1.16 billion from trading the fixed-income, currency, and commodity (FICC) markets in 2014—a 31 percent decline from a year earlier.

While Goldman Chief Executive Officer Lloyd Blankfein is staying positive about the future, analysts detect a change on the horizon—one where stricter financial regulations and a slow economic recovery will make it difficult for banks to make as much money from trading as they did pre-financial crisis. Here’s what Goldman’s news means for you.
So Goldman isn’t making as much money trading. Who cares? Aren’t they still really rich, anyway?
Goldman did manage to beat analysts’ estimates, posting $7.69 billion in
 revenue in the fourth quarter of 2014, but it’s been suffering a decline in its FICC revenue—which has traditionally been a bright spot for the bank—for several years now. That means it’s had to run its business with less money, and therefore pay its employees out of a smaller pool of money over time.
Take a look at Goldman’s compensation ratio—the money spent paying employees vs. revenue. As Bloomberg News’ Michael Moore notes, the share of revenue Goldman set aside to pay employees has steadily declined since the start of the financial crisis, falling to 36.8 percent in 2014 from 48 percent in 2008. Goldman hasn’t had a compensation ratio this low since 2009. While the ratio gives us a peek at what the average Goldman employee is getting paid, its decline over time shows business hasn’t quite picked up in the last few years.
Data: Goldman SachsWhat’s causing Goldman’s trading revenue to decline?
For one, the lack of volatility. When markets are volatile, they move more. That can translate into bigger profits for traders who make the right calls, since the price of equities and securities fluctuates more on a day-to-day basis. That’s also why many traders complain that it’s hard to squeeze out gains when volatility is low. With the exception of a few isolated days in the last few months, volatility over the past year has stayed far lower than at some points in 2010 and 2011.
It’s not just trading—stricter financial regulations have limited lots of moneymaking enterprises that were huge for banks pre-financial crisis, including investment banking. Many have shut down or downsized previously lucrative divisions under pressure to stay in line with regulators’ rules.
Data: BloombergIs this the new normal? Will traders ever be the top dogs in banking again?
It depends whom you ask. Blankfein has said he thinks this dip in trading revenue is temporary.
Others are more skeptical. Banks have been whining about market forces cramping their trading revenue for some time now. While Goldman seems to be doing the best it can under the circumstances, “it’s hard to predict when we return to some level of healthy volatility and strong business growth globally that could drive better trading activity,” Devin Ryan, an analyst at JMP Group, told Bloomberg News. Facing a weak global economy, stricter financial regulations, and slumping volatility levels, banks may never again post the type of trading revenue they saw in the heydays of the late-2000s.
Does this mean all of Wall Street is doomed?
Nah. Despite investment giants such as Goldman, JPMorgan Chase, and Bank of America taking hits on their earnings in 2014, other pockets of Wall Street have been doing quite well. Last year was the biggest year for U.S. initial public offerings since 2000 (thanks, Alibaba). Mergers-and-acquisitions activity surged to a record high of $1.6 trillion in 2014. Even the equity market has been defying the bears’ warnings, with the benchmark Standard & Poor’s 500-stock index finishing off last year with an 11 percent gain.
Investment banks may hold less appeal for young professionals, especially if the fat compensation packages that have traditionally attracted the brightest college and MBA graduates start to dwindle. Graduates of some top MBA programs have started to pick other career paths. At Harvard Business School, for example, only 5 percent of graduating MBAs took jobs in investment banking in 2014, down from 12 percent in 2007.