'The best run I've ever had': Inside Wall Street's coronavirus-fueled trading frenzy, where historic shocks of volatility are creating career-defining moments
- Much of Wall Street's trading force is now working home offices and living rooms, as the coronavirus pandemic has rendered the world's financial headquarters a ghost town.
- But a smaller number of essential traders are still trekking into largely deserted offices.
- In part, that's because even the most sophisticated home setups come with disadvantages, and some client orders are still best executed in the office, according to some traders Business Insider spoke with.
- Some are also catalyzed by the recognition that this is likely the seminal moment in their careers.
- Many Wall Street trading desks are minting enormous revenue hauls amid the frenzied selling. In one month during the period, a trading group at JPMorgan more than doubled the figure it typically earns.
- Visit BI Prime for more Wall Street stories.
As a global health crisis raged outside, and markets convulsed and quaked with historically intense volatility, some of Wall Street's largest trading floors have been uncharacteristically quiet.
At one of New York's top banks, a trading floor that usually bustled with hundreds of personnel was staffed with less than two-dozen people last week, primarily "essential risk takers," spread across the vast space and avoiding contact, according to a senior trader who's continued to report to the bank's headquarters amid the unfolding novel coronavirus outbreak.
"It feels a little safer," he said, reflecting with a laugh on his vacant work space, which would typically be coursing with energy amid wild market swings. "It definitely feels weird."
The pandemic has engulfed New York City, the epicenter of the US Covid-19 outbreak with nearly 35,000 confirmed cases and over 775 deaths as of Monday, rendering the world's financial headquarters a ghost town.
While financial-services firms are considered essential businesses, much of Wall Street's trading force is now working from home offices and living rooms, even if some banks dragged their heels in blessing the migration.
But as rainmakers in other divisions like investment banking moved to work from their living rooms, some of Wall Street's most important traders have still been trekking into the office.
These are unprecedented times for traders, and banks are working to roll out WFH capabilities while maintaining essential services. Some we spoke to said even the most sophisticated home setups put them at a disadvantage, and some client orders are still best executed in the office.
But some, even those around during the 2008 financial crisis, are also catalyzed by the recognition that this is likely the seminal moment in their careers - and they may never again see such eye-popping trading revenues.
"This is the best run I've ever had," the senior trader said. He added: "You'll have to drag me out of there."
A trading bonanza amid a remote-work scramble
Business Insider spoke with more than a dozen traders and trading executives about life during the coronavirus crisis, which has whipsawed markets and produced the most volatile trading days in history.
During the meltdown in February and March, financial assets across stocks, bonds, currencies, and commodities have hit watermarks, either in terms of how far or how fast they plunged.
From its all-time high in late February, the S&P 500 lost 34% of its value - cleaving trillions off of corporate market capitalizations - before rebounding this week on optimism over the $2 trillion stimulus package US lawmakers brokered.
Since it first shot up on February 24, the CBOE Volatility Index, known as the VIX, has swung violently and at times abnormally, setting multiple records.
This has led to a bonanza of trading activity among investors, as well as a mad scramble by broker-dealers to keep up with the client demand - all while simultaneous navigating a broad shift to remote work to protect staff and mitigate the virus' spread.
In the early days of the outbreak in the US, big banks moved to split staff between the main office and backup sites. But as infections soared, including cases among bank personnel, and public officials took increasingly severe measures to shut down New York City activity, most banks tossed those plans and quickly began transitioning personnel to remote work.
"Only essential risk takers are at the various offices. Whoever can be at home, is at home," the senior trader said.
At Citigroup, less than 9% of the firm's 2,200 North American markets employees are still reporting to offices, and even some of the firm's essential risk takers are working remotely, according to people familiar with the matter.
Goldman Sachs's four trading floors in New York typically house thousands of traders during normal business times. By March 19, that had fallen to the low hundreds, according to a person briefed on the numbers. Three days later, CEO David Solomon said in a voice message to staff that about 80% of the firm's 38,000 global employees were working from home, suggesting more than 7,000 were still going into the office.
Bank of America was one of the last holdouts, still maintaining the vast majority of its trading staff in its Manhattan headquarters of One Bryant Park until last week, when in the face of staff backlash it announced it would allow traders to execute trades from home, according to a March 24 report from the Financial Times.
Gargantuan trading days and gamma traps
One reason some traders aren't just willing but excited to report for in-office duty: Many Wall Street trading desks are minting enormous revenue hauls amid the frenzied selling.
Trading desks that anticipated the chaos that enveloped China in January and February would migrate to Europe and the US positioned their books accordingly
Equity derivatives, interest rates, and currencies have been among the best performers, according to several industry insiders.
"Everybody kept brushing it off like this would never happen here," an equity derivatives trader said. "So we put on protection trades that worked out."
Such hedging trades essentially pay a small premium to a counterparty investor and provide a substantial but long-shot payoff if intense volatility strikes.
"It's a tough trade to put on because you're going to be wrong the majority of time," the derivatives trader explained.
But what unfolded was one of the most volatile periods in markets history.
The two largest ever single-day VIX spikes came in March. On Thursday, March 12, the trading day following an evening address by President Donald Trump in which he announced a travel ban to Europe and also erroneously said trade and cargo would be blocked, the index spiked nearly 22 points, or 40%, to close at 75.47.
The following Monday, March 16, after a national-emergency declaration by Trump on Friday and a surprise rate cut by the Federal Reserve on Sunday, the index leapt a record 25 points, or 43%, to a close of 82.69, while the S&P 500 dropped a staggering 12%. The VIX close that day is also a record high, besting any closing mark during the financial crisis.
And the index, which typically moves the opposite direction of the S&P 500, has sustained elevated levels, even amid sharp upticks in the stock market.
The intense movements, which have eclipsed in severity the market upheaval when Lehman Brothers failed in September 2008, have in part been intensified by the rise of trading strategies that account for volatility and market momentum, according to Garrett DeSimone, head of quantitative research at OptionMetrics, an options database and analytics provider.
Such funds target specific levels of volatility they need to maintain. If they're hedging with options with the view that volatility will stay low or fall, a surge in volatility requires them to sell the underlying asset and rehedge to maintain that targeted level of volatility.
They're forced to sell assets into an already falling market, further intensifying the markets move. The dynamic, involving options that account for how rapidly the underlying asset changes in price, is known as a gamma trap.
"It's a feedback loop that only exacerbates the situation," DeSimone said.
If banks held the opposite of that trade consistently, they'd lose money. But the extreme bouts of volatility in March have led to massive paydays for astutely-positioned trading desks that serve the clients racing to keep their gamma hedges up to date.
Trading hauls could help dull earnings pain
Barclays' earned roughly $250 million across its trading businesses on a single day in March, Business Insider reported. The haul, in part from equity derivatives trades, came the Monday after the Federal Reserve's surprise move to cut rates to nearly zero, on March 16.
JPMorgan Chase, the top equity-derivatives trading operation on Wall Street, according to industry rankings by Coalition, has raked in huge revenues on the volatility trades.
JPMorgan Chase's global equity-derivatives team has made over $1.1 billion since volatility first shot up February 24, according to people familiar with the matter. The bank typically earns around $500 million in derivatives in a given quarter, sources said, and more than $1.6 billion across its entire equities sales and trading business.
Bank revenues are expected to decline in aggregate, as these firms absorb rising loan losses, decreased consumer spend, and the impact of rock-bottom interest rates.
Morgan Stanley analysts on Thursday revised their 2020 estimates for 18 large banks and consumer finance firms to account to account for the looming recession, anticipating a median 17% reduction in earnings-per-share compared with prior estimates.
Large US banks like Goldman Sachs, JPMorgan, and Citigroup faced the steepest earnings declines. Still, some of these firms have said they are putting layoffs on hold as they anticipate a frenzy of activity once the economy revs up to speed.
In the near term, markets operations are helping neutralize the pain, and most banks are expected to produce stellar revenues compared with a typical quarter.
Some individual trading desks are posting numbers in excess of $100 million in a given day that are unlikely to be repeated in their careers - and they're already growing unphased by it.
"Those are the numbers that limit up/down for a week can produce," said one sell-side derivatives trader, referencing the stock-market circuit breaker that halts trading when the market falls too steeply - an otherwise highly rare occurrence. "Doesn't take much risk to get to big numbers in either direction."
Another trader echoed that view.
But the giant numbers some trading desks are putting up do not mean the market, and the unusual circumstances, have been easy to navigate. Some have indicated that the introduction of the remote-work dynamic have exacerbated some challenges, including market liquidity.
An ETF trader who also worked through the 2008 crisis said this is "the least liquid period I've ever traded in."
"I think having traders being home certainly has an impact on liquidity," the trader said. "The human factor of this situation is impacting it."
