The investment bank reaped a $200 million profit on Feb. 5, the day volatility exploded back to life in equity markets as the Dow registered its largest one-day point drop in history. The bank’s score can be attributed to long-vol positions that had recently been put on by the flow derivatives group, a group within Goldman’s equity desk responsible for trading VIX derivatives. The $200 million in winnings is roughly equivalent to what Goldman’s derivatives desk takes home for the entire year. For all of 2017, the trading business for the entire bank exceeded $100 million in revenue on just four days.
During the selloff, demand for Goldman’s VIX options from its institutional clients suddenly rendered its positions incredibly profitable, and they were quickly sold. The trade was a major boon for Managing Director David Casner, head of the flow derivatives group, who joined the bank in 2002. Casner’s trade was by far the largest contributor to the 38% jump in equity trading revenue to $2.3 billion, which exceeded expectations for Goldman, and also exceeded results for Morgan Stanley and JP Morgan, Goldman’s two biggest rivals in the world of equity trading.
Here are the standouts from Goldman’s Q1 earnings report:
- Equities sales & trading revenue $2.31 billion, estimate $1.85 billion, up 38% from $1.67 billion
- Trading revenue $4.39 billion, estimate $3.89 billion, and up 31% from $3.36 billion
- Investing and Lending (Prop) revenue $2.087 billion, up 43% from $1.464 billion
Here’s what Goldman initially said about its equities trading revenue:
Net revenues in Equities were $2.31 billion, 38% higher than the first quarter of 2017, primarily due to significantly higher net revenues in equities client execution, reflecting significantly higher results in both derivatives and cash products. In addition, commissions and fees were higher, reflecting higher market volumes, and net revenues in securities services were higher, reflecting higher average customer balances. During the quarter, Equities operated in an environment characterized by periods of high volatility and an increase in client activity compared with the fourth quarter of 2017
And here’s how Goldman’s outlier quarter, its best Q1 2015, looks in context:
Of course, Goldman’s bets could’ve just as easily gone awry, just like an ill-fated bet on regional natural gas prices that hampered commodity trading revenues last year, which was Goldman’s worst year for trading revenues since 2004.
Fortunately – that is, if the investment bank’s strategists are correct – Goldman will soon have more opportunities to profit from a surge in volatility.
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