Brokerage firms, along with related stock exchange traded fund, could finally be turning around as trading activity in the fixed-income space touched its highest level this year.
The iShares US Broker-Dealers ETF (NYSEArca: IAI), which tracks U.S. investment banks, discount brokerages and stock exchanges, has underperformed the broader market for most of the year, rising 3.4% year-to-date, compared to 6.4% gain in the S&P 500 Financial Index and 8.1% increase in the S&P 500.
However, things are looking up as trading activity picks up. In the bond market, trading volume across almost every fixed-income category increased, with an average daily trading volume up 11% in September month-over-month, its highest level this year, reports John Carney for the Wall Street Journal.
The improved trading activity is good news for brokers, including Goldman Sachs (NYSE: GS) and J.P. Morgan Chase (NYSE JPM), where firms have trudged through disappointing earnings for several quarters, partly due to a decline in their fixed-income, currency and commodity units.
Goldman Sachs is the largest holding in IAI at 9.8% of the fund, followed by Morgan Stanley (NYSE: MS) 8.7% and Charles Schwab (NYSE: SCHW) 7.6%. IAI also includes some other investment services firms, including the CME Group (NYSE: CME) 7.3% and Intercontinental Exhange (NYSE: ICE) 6.6%.
Fueling a rise in trading activity, the diverging central bank policies are creating opportunities in the fixed-income market – the U.S. is signalling an end to its loose monetary policies, whereas the European Central Bank, People’s Bank of China and Bank of Japan are moving toward more easing.
The differing monetary policies are also contributing to volatility in the foreign-exchange markets, notably bolstering the strength in the U.S. dollar, which could also benefit currency trading revenue among brokerage desks.
Moreover, the fixed-income market could experience greater activity as money managers weigh the effects of Bill Gross’ switch to Janus Capital (NYSE: JNS) from PIMCO. [These ETFs Could Benefit From Gross Joining Janus]
The industry experienced a slowdown in trading action last year for FICC, or fixed-income, commodities and currencies, due to uncertainty over the Fed’s plan to wind down its asset purchase program, along with the government shutdown
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Max Chen contributed to this article.