* Top banks see slide in trading revenue
* Fixed income, currency trading the main losers
* Equity deals take bigger slice of trading pie
* Trend to continue into year-end
By Simon Jessop and Toni Vorobyova
LONDON, Oct 31 (Reuters) - Europe's leading investment bankstook a trading revenue battering in the third quarter that showsno signs of reversing before the end of the year and gives aglimpse into the upheaval facing the industry as a whole.
The combination of a regulatory drive to make markets lessrisky, a reduction in banks trading for their own account andthe end of a 30-year bull market in fixed income is forcing allbanks to rethink their operations and, in most cases, shrink.
Fixed income and currency desks took the biggest Q3 hits -to leave equities with a larger slice of the trading pie - asconcern over a scaling back of U.S. stimulus crimped volumes,scuppering a tentative rebound seen at the start of the year.
Deutsche Bank, UBS and Credit Suisse reported a collective drop in trading income of around$2.5 billion after lower client activity in a "subdued" and"difficult" trading environment.
BNP Paribas and Barclays also reporteddouble-digit percentage drops in revenues from their fixedincome businesses - a weaker trend begun by U.S. banks such asGoldman Sachs and JPMorgan.
While revenues normally take a seasonal dip in the thirdquarter, most of the banks also saw a drop year-on-year, as theslide was exacerbated by economic and political uncertainty.
"We expect Q4 trading to be more of the same. It'sseasonally the weakest quarter for FICC (fixed income,currencies and commodities) as sales and trading desks typicallytake a lot of risk off from mid-November in the context of lowerliquidity," said Kinner Lakhani, European banking analyst atCiti.
Beyond seasonal trends, regulation and de-risking of bankbalance sheets are set to further pressure FICC in the long run.
Stock trading revenues at the top 11 global investment banksare set to rise $11 billion into 2015 while FICC revenues willfall $2 billion, leaving the market as a whole much smaller thanat its pre-crisis peak, according to UBS research.
FICC units are particularly vulnerable to the sweep ofregulatory change to make markets more transparent and bankstake less risk, in a bid to prevent another financial crisis.
Part of that involves forcing more deals on to exchanges,pressuring margins, particularly in FICC units, which rely onbespoke deals, and this has jump-started a retreat by banks fromareas where they do not have a dominant position.
"There is a swing (from FICC to equities) ... but the marginon trading equities is lower, so if all of these big guys wantto be equity traders, there won't be enough equity for them totrade," said Arun Melmane, banking analyst at Canaccord Genuity."So some will win and some will lose."
UBS data showed the top investment banks saw a 20 percentslide in FICC and 47 percent in equities between 2006/7 and2012, contributing to a revenue pool of around $300 billion, ofwhich FICC accounts for more than half.
OCTOBER BLUES
Although banks report in different ways, amalgamatingnumbers from Deutsche, UBS and Credit Suisse suggests tradingrevenues dropped $2.5 billion quarter-on-quarter, based oncurrent exchange rates, Reuters calculations show.
Barclays and BNP both noted weakness in fixed income and astronger year-on-year showing in equities.
In European equities, volumes traded on the FTSEurofirst 300index dropped 8 percent in July to September, theirfirst quarterly drop this year and the second quietestthree-month period since 2006, according to Thomson Reutersdata.
Fixed income suffered more, as trade in German governmentdebt fell 21 percent, the steepest quarterly fall in nearly twoyears. Cash corporate credit volumes fell 16 percent in thethird-quarter, Tradeweb said.
Average daily currency trade fell 7.6 percent in the thirdquarter from the second, data from CLS Bank, which operates thelargest foreign exchange settlement system, showed.
Hopes for a marked reversal of that trend in the fourthquarter look slim given daily volumes in both bonds and stocksin October are running below their January to June average, hitby a U.S. government shutdown.
While Tradeweb and CLS gave no October numbers, a spottrader at a large European bank in London said foreign exchangevolumes were "anecdotally down 20-30 percent".
A tailing off in volatility as central bank monetarylargesse limited price moves contributed to those lower volumesand reduced demand for some stock and bond derivatives.
While that is likely to broadly remain the case into 2014,market concern about the impact of an eventual reduction instimulus globally is likely to keep trading volumes in check.
In addition, UBS said in its results statement, clientdemand to trade could also be held back by unresolved issuesfrom the European sovereign debt crisis, the health of theregion's banking system and a mixed outlook for global growth.
"This would once again make improvements in prevailingmarket conditions unlikely, and would consequently generateheadwinds for revenue growth, net interest margins and net newmoney," they wrote.
Barclays (BARC)
