How Four Banks Scored a Perfect Trading Quarter By Katherine Ryder, contributor

(Fortune) -- Most traders think the market is something that yields to intelligence and effort, or what proportion can be summoned of both. But it's rare that entire institutions dominate the market as perfectly as Goldman Sachs, JP Morgan, Bank of America, and Citigroup did in the first quarter of this year. Between January 1 and March 31, the four banks made money on every single business day.

The first quarter is traditionally the most profitable for the banks, and this year's was buoyed by robust gains in the equity markets in February and March. But perfection demands a more perfect explanation, particularly given jitters over impending regulation, the threat of new litigation, and the looming withdrawal of the government stimulus that is keeping the U.S. economy afloat.

Also, it wasn't just one bank with perfect results. It was four.

So how did they do it? First among many explanations is a shift in how banks are making profits. Increasingly, Wall Street has turned its focus to "market-making." Banks are getting in the middle of trades-matching buyers and sellers to each other and charging fees on either side-rather than taking huge bets on stocks or bonds or currencies or commodities with their own money. While that shift doesn't mitigate risk, per se, it makes daily profits much less dependent on whether markets rise and fall.

Further, many of these banks' institutional customers are still executing trades out of necessity rather than speculation. Volatility, particularly in the euro, British pound, and specific commodity markets, created an environment where anyone hedging themselves in these markets has had to buy or sell continually, often at great expense. Similarly, banks have profited as once-risk-averse clients have rushed out of treasuries and bonds and into equities and other riskier asset classes.

Another factor benefiting banks is the steep yield curve-which shows the yields of bonds of different maturities. When the yield curve is very steep, as it is now, short-term bonds pay very low yields but long-term bonds pay much more. This benefits banks in a few different ways. First, since rates on short-term debt are low, banks are able to borrow cheaply. Among other things, this allows them to leverage their investments-and make more profit, if they bet correctly.

A steep curve also allows for carry trade along the yield curve-another profitable opportunity for banks. Traders can borrow short-term debt, then relend the money out, long-term, at higher rates, and pocket the difference. Incredibly, with the average interest rate on ten-year Treasury bonds at 3.7 percent last quarter, banks could borrow at next to nothing and lend back to the government at a higher rate.

More nefarious explanations have also been suggested. On March 31, the last day of the quarter, the Fed ended its program to buy $1.25 trillion of mortgage-backed securities. Some market-watchers have suggested that banks may have bought up risky assets during the quarter, knowing that if the investments worked out they could keep the profits, and if they went bust the Fed would absorb the losses.

Whatever the cause of the perfect quarter, it comes as part of a pattern. Goldman (GS, Fortune 500) president Gary Cohn revealed on May 11 that the bank had only recorded 11 loss days in the prior 12 months. So while some luck is involved in stringing together 61 up-days in a row, the trend of success isn't a fluke. The larger story may well be broader shifts on Wall Street-to acting as market-makers, for instance-that have facilitated this run. To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET


Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.