Energy trading heats up
Banks are expanding their presence in energy trading – again. But with two established incumbents, is there enough profitable business for the newcomers? Kathryn Tully reports.
COMMODITIES HAVE BEEN hawked around, speculated on and hedged for centuries, but Wall Street’s attitude towards trading them has been highly erratic. Plenty of firms have viewed it as an interesting niche business, ploughed money in, got burnt on a large position that their infant businesses were too small to swallow, and shut up shop. True, most businesses at bulge-bracket banks get scaled back as the profitability of any given market dictates. Few, though, are dumped altogether so quickly and unceremoniously as commodities.
Until the next bull run in the market, that is. Right now, on the back of high prices, high volatility, high trading volumes and enhanced interest from traditional counterparties and new investors entering the market, commodities, and particularly energy trading, is hot.
Third-quarter results, not just from energy heavyweights Morgan Stanley and Goldman Sachs, but also others, such as JPMorgan and Merrill Lynch, were propped up by energy trading. When JPMorgan reported a 78% rise in quarterly earnings on the back of strong trading revenue of $2.4 billion, energy trading was particularly strong, and president and COO Jamie Dimon mentioned that he was pleased the bank was investing in this business.