Trading Remains X-Factor for Big Banks

NEW YORK (TheStreet) -- Even as Wall Street tentatively emerges from its near-death experience, one thing certainly hasn't changed: trading remains an outsized and unpredictable component of bank earnings.

"On the outlook slide, you've got the investment bank. Again, we don't know what the future holds. The uncertain environment obviously continues. There are still risks out there and trading can be volatile, so no real guidance for you there. Make your own assumptions," said JPMorgan Chase (JPM) CFO Michael Cavanagh, during the bank's second-quarter earnings call.

Trading, to a great extent, is betting, hopefully educated betting, when practiced by large, powerful institutions like JPMorgan, Goldman Sachs(GS) and Morgan Stanley(MS). Check out a preview of this week's big reports, complete with re-caps of second-quarter numbers:

Most of the trading that banks do is in the fixed-income markets, which are larger than equity markets, and far less transparent.

A degree of predictability entered the fixed-income trading business last quarter, as the fates of Bear Stearns, Lehman Brothers and Merrill Lynch allowed even severely weakened banks like Citigroup(C) and Bank of America(BAC) to benefit, while stronger ones like Goldman, JPMorgan and Credit Suisse (CS) made a killing, despite apparently taking less risk than usual. The profits came from charging higher-than-usual margins for acting as a go-between on relatively safe trades -- a brief return to an era on Wall Street that hadn't been seen for more than a decade.

That scenario -- the return of predictability -- came as a big surprise, however, and it is likely to be gone as suddenly as it came, as smaller dealers such as Jefferies Group(JEF)and foreign banks that did not have a strong U.S. presence, such as Nomura(NMR), BNP Paribas and HSBC(HBC), beef up their operations here, according to Tim Sangston, managing director at consulting firm Greenwich Associates.