It's Probably Best Not To Think Too Hard About JPMorgan's Revenue-Per-Trade Breakdown

Despite its overwhelming brown-ness I was kind of mesmerized by this slide from Jes Staley's presentation for use later today at JPM's investor day:

The table shows the "number of trades" and revenue per trade for a bunch of JPMorgan's investment bank trading products, which it's disclosing now for reasons that are unclear but you can guess. Bloomberg does:

While some European banks describe revenue from large units within their trading divisions, U.S. banks rarely quantify the makeup of their businesses, which generate about a quarter of total revenue at the five largest Wall Street banks. JPMorgan reported $20.2 billion in 2011 trading revenue, which on its own would make it bigger than U.S. Steel Corp. (X) and Capital One Financial Corp. (COF)

“They are pulling up the hem of their skirt so we can see a bit more leg,” said Gary Townsend, a founder of Hill-Townsend LLC in Chevy Chase, Maryland, which owns shares of JPMorgan. “They want to make sure the diversity of these operations is well understood.” ...

JPMorgan’s disclosure comes as banks say the proposed U.S. Volcker rule, which seeks to bar banks from making bets with their own money, threatens market-making operations and could hurt liquidity in the marketplace. The breakdown is probably aimed at educating regulators and may prompt similar moves from competitors, Townsend said.

There are I suppose three potential audiences for this. One is regulators who might see these averages and say, hey, these guys sound all right, let's not put them out of this high-volume low-revenue business of providing liquidity, though as Bloomberg also notes over a third of typical quarterly revenue is missing from this line-item breakdown so is that all like "prop trading and casino gambling"?*

Another is investors ... y'know, the guys at this conference ... and I suppose that diversification will impress them, or not, and if you were worried about say the exchangeification of interest rate swaps and what that will do to margins you might be all "well that's just ... hmm, 10% of IB revenues."

And then there's customers, and here is a guess I am going to make about JPM's cash equities business:
(1) Not everyone (anyone?) pays 1.5¢ a share.
(2) Some pay 1, some pay 2, some pay 3, probably.
(3) If you're paying 3, you have already called your salesperson to bitch.

Just like in executive comp, no one wants to be worse than average. Outside of cash equities though I suppose this chart will be achieve its aims of pleasant vagueness for clients, as in many products it's hard for clients to actually know how much they're paying. (One suspects that these products - rate swaps, say, or equity derivatives - tend to correlate with higher revs-per-trade, though, what am I missing about credit? Even with CDS and distressed and other things that I assume are high-margin it averages $1,500 a trade? Are people buying a lot of odd lots of MSFT bonds or something?) So you can't really benchmark yourself against those averages, and if you do anchor your thinking to those averages well ... that's probably good for JPM. From later in the presentation (casually scribbled red circles are Jes's, not mine):

Now one thing to note about that chart is that it is wrong. The previous slide shows about 6mm fixed income trades a quarter; this one shows 100K or so a day. That checks out; a quarter is like 65 trading days. Those $1mm+ trades are 0.06% of trades; but 0.06% of 100K = 60 a day, not 10, and 0.06% of 6mm = 3,600 a quarter, so either way around 15,000 trades a year at $1mm+. That's $15bn+ of revenue, which in round numbers is 100% of FICC revenue, not 25%.

But another thing to note about it is that JPMorgan is getting a whole bunch of its revenue from 10, or 60, or whatever trades a day at a million bucks or more a pop of not always transparent spread income. Some of those are presumably outsized, risky trades. Some of them though are just ... let's say somewhat smaller, less risky trades with what we might call valued customers.** And for them, that list of averages must provide a warm glow as they think about how hard their JPMorgan banker works for a modest five-figure return.

JPMorgan Says Credit, Swaps Lead Trading-Revenue Sources in Rare Breakdown [Bloomberg]
Stuff from JPMorgan's Investor Day
Live Blog: Investor Day at JPMorgan Chase [DealBook]

* Well? Is it? This table is obviously based on very very stylized facts but one plausible assumption is that this encapsulates all revenues that are like day-one revenues-against-mids taken on trades. Y'know, "spread." If a third of revenues come from the other thing - y'know, "price appreciation" - then I guess that would make Paul Volcker sad. It's certainly not clear from this presentation anyway, though to be fair there is a chart showing that DV01 risk for rate swaps turns over like 50x a day so I suspect that the right reading here is "these numbers are squiggly" and not "we're in the business of sitting on appreciating positions" though probably that too.

** Who are they? Well there may be a reason that the slide between those two slides shows the percentage of Fortune 500 customers using various derivatives products. It's high! The 20% of F500 companies using credit derivatives aren't paying $1,500 a trade.