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Wall Street has been a cheerless place for the past month. But don't look for too much of that gloom to show up in the quarterly earnings the Street's biggest brokerages will report next week.

Since May, the market has been more unpredictable than it has been in years. Volatility hit its highest levels in since 2004, and the main reasons -- a fresh-faced

Federal Reserve

chairman and a three-year bull market ready for a correction -- are likely to be with us for a while.

For brokers, that's mostly good news.

"Trading activity and volumes go up when there is greater volatility, and that should be welcomed by transaction-based businesses," says Jim Paulsen, chief investment strategist at Wells Fargo Management.

Wall Street firms such as

Goldman Sachs

(GS) - Get Goldman Sachs Group Inc. (The) Report


Morgan Stanley

(MS) - Get Morgan Stanley Report

derive up to 40% of their revenue from trading, a business that involves making markets and structuring stock, bond and derivatives transactions for big clients such as hedge funds and pensions. Usually trades multiply when investors are uncertain about the market, and volatile times create a flurry of business for brokers.

On the other hand, another big Wall Street business might not be so lucrative: proprietary trading, where brokerages use their own money to make bets on the market. Prop trading, as it's usually called, can benefit brokers in boom times. But since traders at large institutions are no more adept at predicting market trends than big clients such as hedge funds, volatile periods can lead to slip-ups. And those can kill an otherwise good quarter.

"In essence, if they run their businesses correctly, they are going to benefit from volatility. Meaning that if they don't take large positions and they just work with customer order flow, they will do well with high volatility because of more trading," said Richard Bove, an equity analyst at Punk Ziegel. "Where they run into difficulty is if they take a large proprietary position."

Ideally, the two types of trading revenue move in tandem. Take Goldman Sachs, for example, which has become the archetypal trader among the brokers. Last quarter, Goldman dazzled Wall Street with revenue in its FICC division -- fixed income, commodities and currency. Its success, a shock at the time, was attributed to rising commodity prices. Goldman likely benefited from its own bets in commodities, as well as the bets of others, many of which were using Goldman as a broker.

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This quarter, however, the story could have a twist.

In May, commodities and equities took substantial hits. Since topping 11,642 in early May, the

Dow Jones Industrial Average

has fallen 6%. The

S&P 500

has dropped 5%, and the


fell almost 8%. Meanwhile, the VIX, a volatility index for equities, hit a high for the year of 18.66 on May 30. That's almost twice the reading from the last week in December. Commodities, while still up since the beginning of the year, fell hard in the last month. The Goldman Sachs commodities index has dropped around 1.5% since the beginning of May.

Goldman undoubtedly benefited from its clients trading in and out of commodities and equities, given the amount of volatility. But what about its own trading?

"They are the biggest commodities traders in the world, and Goldman does like to take prop positions," Bove says.

Trading circles have started to buzz with unconfirmable gossip that big banks were leaning the wrong way when the worm turned in metals and crude oil markets. Goldman itself seems less enamored with the commodities business lately, having dumped one-third of its position in the

Intercontinental Exchange

(ICE) - Get Intercontinental Exchange Inc. Report

for $20 million after a lockup expired. These concerns are part of the reason Goldman's shares are down nearly 15% from their April highs.

Still, while Bove agrees the commodities prop trading could eventually become an issue, it won't graze the glaze on this quarter's earnings.

"They have managed their books relatively well this quarter," Bove said. "Commodity prices have been relatively strong, and the debt capital markets tend to do a lot better in the first half of the year than in the second. There are not any meaningful negatives that one can say."

Heading into Wall Street earnings season, the one certainty remains uncertainty. Analyst estimates for the group are often laughably off, in part because of the difficulty involved in predicting any single firm's trading results. The difficulty is exacerbated when firms don't differentiate between client and prop trading in their revenue charts.

"They don't break out the trading, and they refuse to tell you what it is," Bove says. "So it's purely guesswork to tell what proportion of trading is prop trading,"

Lehman Brothers


kicks off second-quarter earnings Monday, and it should be a good proxy for the rest of Wall Street. The firm is considered one of the best brokers on Wall Street, and erratic markets will help. At present, analysts surveyed by Thomson First Call expect Lehman to report earnings of $1.60 a share on revenue of $4.18 billion.

Goldman reports Tuesday and is expected to post earnings $4.19 a share on revenue of $8.23 billion.