Another perfect trading quarter? Don't bet on it.

By David Ellis, staff writer

NEW YORK ( -- Wall Street's winning streak was good while it lasted.

In the first quarter, four of Wall Street's largest banks managed to make money from their trading desks in every one of the quarter's 64 business days -- a phenomenon now dubbed "perfect trading quarter."

Market volatility has soared in recent weeks amid fears about Europe's debt problems.

The banks didn't just earn chump change either. Bank of America (BAC, Fortune 500) made at least $50 million a day 30 times during the quarter while Goldman Sachs (GS, Fortune 500) booked at least $100 million in 35 days of the quarter.

JPMorgan Chase (JPM, Fortune 500) and Citigroup (C, Fortune 500) were the other two firms to report trading profits every day of the first quarter.

Much has changed since the end of March however.

There was the trading error on May 6 that sparked the so-called "flash crash" which sent the Dow Jones industrial average down nearly 1,000 points before it managed to recoup some of those losses.

Sovereign debt fears in Greece and other parts of Europe have only exacerbated market troubles, pushing the closely-watched CBOE Volatility Index, or "fear gauge" better known as the VIX, up nearly 60% over the last three months.

Those worries have not only meant a wild ride for stocks. Currencies and commodities have seesawed in recent weeks amid worries about Greece and the direction of the broader global economy.

"All asset classes have experienced tremendous volatility over the last month," said Michael James, managing director for the Los Angeles-based investment firm Wedbush Morgan.

Volatility can be a tricky thing for those that make their living trading on the direction of the markets. In periods of violent swings, the gains can be massive, but the losses can be just as painful.

Last quarter, banks weren't vulnerable to such troubles.

Stocks moved steadily higher during March thanks to a growing belief that the U.S. economy was turning a corner. During that same period, the VIX fell 10%.

Greater investor confidence also spurred brisk activity in the bond market, as corporate debt was actively issued and traded. Wall Street firms earn fees from such transactions by partnering buyers and sellers.

The recent market turmoil has brought some of that activity, particularly high-yield debt, to an abrupt halt. Clothing maker Jones Apparel Group (JNY), for example, is among a growing number of companies that have postponed plans to issue bonds recently because of the market upheaval.

Thus far, executives at Wall Street's top firms have not spoken publicly about the level of trading or client activity so far this quarter. Typically, firms will not comment on business activity while the quarter is in progress.

But the recent market shake-up is certainly poised to impact Wall Street's trading profits in other ways as well.

With investors looking for a safe haven to park their money in recent weeks, many have opted for the security of U.S. Treasuries, effectively flattening the yield curve.

Over the last month, the difference between the yield on the 2-year Treasury and the benchmark 10-year note, has narrowed by nearly half a percent.

Financial firms, as a result, are no longer able to capture the same type of profits they did by borrowing money cheaply and lending it back out. More importantly, it is not likely they will be able to translate those borrowed funds into large, leveraged trades like they did just several months ago.

Then again, Wall Street firms weren't exactly expecting another perfect quarter to begin with. Trading gains tend to be concentrated in the first quarter in the first place. And delivering a perfect quarter is a relatively rare phenomenon.

Goldman Sachs had never experienced a quarter with no trading losses in a single day until the first quarter of this year, the company said. And the last time that JPMorgan Chase reported a profit every single trading day in a quarter was in 2003, according to a company spokesman.

"The high level of trading and securities gains in the first quarter of 2010 is not likely to continue throughout 2010," JPMorgan Chase wrote in its quarterly filing.

Lower trading revenues could take the shine off recovering profits at many of these top banks.

Last quarter, 80% of Goldman's revenue derived from its trading operations. At JPMorgan Chase, trading accounted for more than two-thirds of its profits in the quarter.

So when the second quarter comes to an end, Wall Street might just have to settle for something a little less than perfect. To top of page

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