JPMorgan, Citigroup feast on equity derivatives in virus panic

BLOOMBERG – The historic panic in global stock markets has spawned a fortune for some of the world’s biggest investment banks.

JPMorgan Chase & Co and Citigroup have added about USD500 million in revenue from equity derivatives trading year-to-date compared with the same period in 2019, people familiar with the matter said. Trading surged as investors rushed to bet on stock moves and protect their holdings.

The spreading coronavirus has killed thousands, roiled the global economy and forced Italy to announce a nationwide lockdown. But for Wall Street’s trading desks, which rely on volatility to generate profit, the turmoil is an opportunity after investment banks long bemoaned the calmness of markets in recent years.

Patrick Burton, a spokesman for JPMorgan in London, declined to comment, as did Edwina Frawley-Gangahar, a spokeswoman for Citigroup. JPMorgan has generated about USD300 million of additional revenue so far this year, including about USD50 million in one trading day in late February, according to the people, who requested anonymity as the details are private. Citigroup has made between USD150 million and USD200 million, the people said.

Recent swings in United States (US) stock prices rank among some of the biggest in market history as investors struggle with the fallout from the coronavirus and an oil price war. That’s triggering a surge in demand for equity derivatives, which allow investors to make complex bets on shares and volatility in stock markets and protect against losses.

Trading in options linked to the S&P 500 Index, among the most popular equity derivatives, surged to a record high of more than 3.5 million contracts in February. The CBOE Volatility Index jumped to the highest since 2008 on Monday.

The stock market chaos means equity derivative revenue may snap back from last year’s drop. Wall Street banks generated about USD12 billion from equity derivatives in 2019, a 17 per cent decline from the previous year, according to research firm Coalition Development Ltd.

“It’s been a good start to the year,” said Amrit Shahani at Coalition in London. “Our expectation is it will be better than 2019.”

The S&P 500 gained as much as 3.7 per cent in early New York trading – after a plunge on Monday – as US President Donald Trump announced “substantial” economic measures on Tuesday in response to the virus. The rebound faltered as signs mounted that the stimulus is not imminent.