Merrill Posts Record FX Trading Gains In September, Quarter, Nine Months

Merrill Lynch posted its most impressive foreign exchange trading revenues ever in September, which also helped lift nine month and third quarter FX gains to new heights, officials there confirm. Other investment banks with sizable foreign exchange operations are also likely to follow Merrill's lead, sources surveyed say. However, PaineWebber and Smith Barney, which don't have much of a profile in the market, weren't quite so lucky.

One benefit the investment banks didn't have in the turbulent quarter however, sources contacted say, was a direct line to the central banks. "It's changing, but right now, the central banks don't deal with the investment banks very often," says one source at a major investment bank. Ultimately, as the investment banks become bigger players they will get more and more recognition, he says. "But when you hear these stories about the central banks making the banks rich, that doesn't apply to Merrill, Morgan Stanley or Goldman."

The Federal Reserve Bank accepted applications from the investment banks earlier this year, but sources at those banks say they haven't heard much from the U.S. central bank since. However, a spokesman at the Fed says the bank has indeed "done business with some of the investment banks in the interventions" this year, though he notes that "the business we do is going to be predicated strictly upon our needs at that particular moment," and since the central bank has been keeping a relatively low profile in the market this year, "the counterparties we choose to deal with can be relatively few."

As far as the applications are concerned, "there is no real formal application process that brings a potential counterparty into our circle of potential counterparties," the spokesman notes. Meanwhile, some of the other central banks are either starting to deal or are looking to deal with the investment banks, those surveyed contend. "It's going in the right direction," says one manager.

Ultimately they note, it may do the central banks some good to start calling on the investment banks. Investment bankers surveyed say they can provide central banks with a view of some of the capital flows that commercial banks can't.

Even without the central banks, principal transactions revenues over at Merrill rose 26 percent to a record $610 million, of which foreign exchange, and foreign exchange options trading gains in particular, accounted for what managing director Joe Petri called "not an insignificant portion." He says Merrill was "positioned properly and we had good customer flow. It was just an ideal period for us."

Though much attention has been paid to the opportunities in the last month of the quarter, Petri says Merrill "also had a good first two months of the quarter." Though he admits that "September was clearly a record month, even if we had just kept the pace of the first two months of the quarter it still would have been a record." The first few weeks of October have also been good, he notes.

Petri says Merrill made a conscious effort to focus on its customers during the turmoil that gripped the markets in September and that focus paid off. "We had a lot of proprietary success over the period, but our real strategy throughout, particularly in September, was to maintain our customer focus." As market participants found out last month, "everybody can make good markets when they are stable but our strategy throughout September was to be consistently competitive."

In keeping with Merrill's pattern in recent years, London and New York outperformed its Far East operation, though "on a relative basis, revenues were up pretty much across the board." Merrill is one of several investment banks which have opened desks in Tokyo in recent years only to find activity there relatively stagnant.

Nine-month principal transaction revenues were also up to a new record at $1.73 billion. The release notes that foreign exchange and derivatives were a contributing factor, but didn't elaborate further.

PaineWebber improved upon last year's performance overall, but foreign exchange wasn't a factor, a spokesperson there says. In fact, Donald Marron, PaineWebber's chairman and chief executive told reporters that "we didn't have the foreign exchange business that Merrill did." PaineWebber reported that principal transactions rose four percent in the third quarter to $189.5 million. For the first nine months, revenue from principal transactions rose 15 percent to $558.4 million.

Meanwhile, Smith Barney, which has a foreign exchange trading desk in New York, but none elsewhere, actually posted lower trading revenues in the third quarter. A spokesperson at the firm says only Smith Barney does a modest amount of FX business, almost exclusively for customers, and therefore wasn't a beneficiary of the turbulent market conditions that proved such a boon to Merrill. Principal trading revenues at Smith Barney slipped 12 percent from levels a year ago, to $68.3 million in the third quarter. For the first nine months of the year, principal trading fell a more modest three percent to $234.1 million.

Trading revenues were far more buoyant at Bear Stearns in the three-month period ended September 25, its first fiscal quarter. Revenues from principal transaction rose 40 percent to $250.6 million. David Schoenthal, who heads its foreign exchange trading operation, didn't return calls seeking comment.