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:
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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.


JPMorgan's Voldemort Probably Isn't That Magical

John Carney has hilariously convinced a bunch of people that JPMorgan whale-wizard Bruno Iksil could actually be running a synthetic bank on top of JPMorgan's actual bank. The theory, propounded to him by a mysterious trader and sort of supported by an old PIMCO client note, is that Iksil was tasked with hedging JPMorgan's inflation risk and did so by putting on a trade that was (1) long TIPS (for the inflation) + (2) long [write protection on] CDX (for the yield). Now I will tell you a thing, which is that I hedge my inflation risk by being (1) long TIPS (for the inflation) + (2) long MegaMillions tickets (for the yield),* but nobody calls me Voldemort. Here is Doug Braunstein's theory about Iksil: On a conference call with analysts, Braunstein said the positions are meant to hedge investments the bank makes in “very high grade” securities with excess deposits. (J.P. Morgan has some $1.1 trillion in worldwide deposits.) Braunstein said the CIO positions are meant to offset the risk of a “stress-loss” in that credit portfolio. He added the CIO position is made in line with the bank’s overall risk strategy. What can that mean? Presumably the sensible view to take from this is that this is actually part of a "stress-loss" hedge; the CIO is short (bought protection on) a lot of shorter-dated corporate credit and funds it by being long (selling protection on) a lot of longer-dated (5-year) corporate credit, so as to be relatively DV01-neutral but long jump risk. This has the advantage of (1) actually hedging a stress loss in high-grade short-term corporate securities, (2) fitting in with the relative lack of noise in the CIO portfolio,** (3) being what people have told Bloomberg he was doing, and (4) being what JPMorgan has actually said it's actually done in the CIO during the crisis. So it's probably true no? But it's fun to pretend! If you pretend Carney is right you can have one of two views.*** One is Izabella Kaminska's, which is "sure, I guess this is a hedge, but boy is it a mysterious one." You can buy this if you have - as she does - a pretty postmodernist view of what a hedge is. I do too, mostly.

Banks Prove That They Are Not Too Big To Fail By Saying "We Can Fail" On A Piece Of Paper, Moving On

One way you could spend this slow week is reading the "living wills" submitted by a bunch of banks telling regulators how to wind them up if they go under. Don't, though: they're about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**: (1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank). (2) If after stiffing its non-deposit creditors it didn't have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar. This seems wrong, no? And not just in the sense of "in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy." It's wrong in the sense that it's the opposite of having a plan for dealing with banks being "too big to fail": it's premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can't get out of without taxpayer support, it'll just file for bankruptcy like anybody else. Depositors will be repaid (if they're under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha.