JPMorgan volatility traders raked in $700 million through June — 3 times what they brought in for all of 2019. Here's how they outpaced Goldman Sachs and Morgan Stanley on one of the hottest trades of the year.

In aggregate, performance is expected to suffer at Wall Street banks as the economy struggles to right itself in the face of the coronavirus — KBW is predicting earnings to fall 25% year-over-year at the median universal bank in the second quarter.

But sales and trading desks have provided a robust buffer against declining interest income and loan loss reserves.

Big banks, by and large, have seen stunning results from their derivatives squads, especially the flow derivatives teams — which specialize in complex directional trades betting how much stocks, indexes, or other macro products will move — that have been in the trenches amid record surges of volatility. 

None moreso than JPMorgan. The firm in the first quarter eclipsed $1.1 billion in equity derivatives revenues, on par with what it made in all of 2019, with a little less than half of the tally coming from its flow derivatives traders, according to people familiar with the numbers. 

Though the shocks have been mild by comparison to those of March, volatility in the second quarter has remained elevated, and JPMorgan's equity derivatives number is expected to land at around $1.3 billion for the first two quarters. The global flow team will finish the first half of 2020 with more than $700 million in revenues, nearly three times as much as the roughly $250 million the group earned in all of 2019, the sources said. 

Other banks posted monster equity derivatives numbers in the first quarter as well, with several eclipsing $200 million from their flow desks. Globally, flow derivatives trading was up 200% in the quarter across the banks.

But even as volatility calmed, JPMorgan continued to press its lead in the second quarter, and there isn't a runner up in flow derivatives — Goldman Sachs and Morgan Stanley have dominated the space in recent years and are said to be next in line — within $100 million of first place, the sources said.

JPMorgan, Goldman Sachs, and Morgan Stanley declined to comment. 

Diverging fortunes

But volatility trades that have minted fortunes for banks have upended investment funds that took the opposite side and bet the cards would fall differently.  

During the meltdown in February and March, financial assets across stocks, bonds, currencies, and commodities hit watermarks, either in terms of how far or how fast they plunged. 

For instance, the CBOE Volatility Index, known as the VIX, swung violently and set multiple records — the two largest ever single-day VIX spikes came in mid-March, and the 82.69 close on March 16 is the highest ever.

As Business Insider reported in March, some flow derivatives desks had put on protection trades that provide a substantial but usually long-shot payoff if intense volatility strikes. 

Investment funds that took the opposite side of those trades, collecting small premiums to insure the banks against massive losses, ended up in a world of pain.

In an autopsy of the carnage, Institutional Investor last week detailed how in one type of trade, Wall Street banks paid funds to effectively cover unlimited losses in the event of a severe market crash — in part to unload risk from their books and pass muster with regulators — which counterparties were happy to do since they presumed the contract would never pay out. 

The result: Malachite Capital, Ronin Capital, Parplus Partners, and Allianz's Structured Alpha hedge funds were wiped out, while Canadian public fund AIMCo lost more than $1.5 billion and the Canada Pension Plan Investment Board was burned to the tune of $515 million. 

Stock-trading results have been mixed this year at the banks, too, even within product subsets.

In the first quarter, equities revenues at the 12 largest banks increased just 3% from last year to $11.2 billion, despite the substantial increase in trading activity and strong showing in flow derivatives, according to a quarterly report from Coalition. 

That's in part due to weaker prime brokerage performance as hedge funds took hits, but also because while volatility was spurring some desks, other banks "reported significant write downs" thanks to structured derivatives products that went awry, according to the report. 

Those writedowns are alluding to losses at French banks BNP Paribas, Societe Generale, and Natixis, which saw complex equity derivatives tied to shareholder returns go up in smoke after an unexpected and "sudden cut in corporate dividends," S&P Global said in a report last week. 

That erased around $1.5 billion in revenues between the three firms, according to a report from Bloomberg.

Read more: Inside Wall Street's coronavirus-fueled trading frenzy, where historic shocks of volatility are creating massive paydays

Echoes of 2018

The last time banks made such eye-popping trades from their volatility desks was during the VIX spike back in February 2018. Prior to the frenzy earlier this year, the 116% rise in the VIX on February 5, 2018 — which followed a long stretch of unprecedented market calm — was the largest single-day increase on record.

The flow derivatives teams at Wall Street banks raked in hundreds of millions in the process. That year, Goldman Sachs led the field with about $650 million, followed by Morgan Stanley with about $550 million, according to sources familiar with the numbers. 

In the aftermath, a poaching war ensued, and many of the standout traders cashed in their chips that spring and summer for promotions and raises at other firms, resulting in dozens of seat changes. 

At JPMorgan, global volatility trading is now run by Rachid Alaoui, a 15-year company veteran who took over the role after Fater Belbachir left for Barclays in early 2019.

Other roles have turned over since 2018 as well. Senior US flow traders David Kim and Seok Yoon Jeon decamped for Bank of America and Citigroup, respectively, amid the hiring frenzy in 2018. 

That summer, JPMorgan in turn poached Borzu Masoudi — who was instrumental in Goldman's $200 million trading day during the February VIX spike — to run volatility trading in the US, where much of JPMorgan's derivatives trading gains have come this year.

As markets recovered in April and May of this year, volatility fell from the meteoric heights seen in March but remained at historically elevated levels. Overall trading numbers are expected to be strong compared with 2019 — KBW is predicting a 15% increase year-over-year in stock trading across the big-5 US banks — but equities revenues are expected to fall about 14% compared with the first quarter. 

Very little has been predictable about 2020, and with coronavirus cases on the rise again in the US, it's unclear how the economy and markets might respond in the second half of the year.

The record numbers produced by derivatives traders at Wall Street banks could still significantly increase — or decrease — if conditions devolve and American businesses suffer deeper losses, sending more sudden jolts of volatility into the markets. 

Read more:

• 'I've never seen it like this in 10 years': How the VIX blow-up led to a talent raid on Wall Street trading floors
• Equity is the new debt, with Corporate America selling record amounts of stock to stockpile cash. Here's what prompted the sudden shift.
• Wall Street's disaster playbook never included work-from-home trading. Insiders explain how banks rapidly adjusted during one of the most chaotic markets in history.
• Coatue is returning all outside capital in its $350 million quant fund after computer-driven trades broke down in extreme market volatility
• Worse than the 2007 'Quant Quake': Huge quant names like Schonfeld and Bridgewater are getting slammed as market chaos blows up computer-driven trades