The Straight Dope on Investment Banks

There are many old investment sayings, and one of them is "Buy what you know." At times that can be expanded to "Don't buy what you know" -- if and when you know what drives a stock's underlying business is not good. Case in point, the publicly traded investment banks. By and large, the business model for these companies is derived from trading volumes, public offerings and other investment banking activities, such as mergers and acquisitions. While earnings shortfalls abound this week, we cannot rule out that small to midsize domestic investment banks won't join that group in the coming weeks.

Sifting through first-quarter 2012 earnings reports, we know that trading volume at both the NYSE Euronext (NYX) and the Nasdaq OMX Group (NDAQ) were down year over year. More specifically, we learned in early April that cash trading and listing net revenues for NYX were down 7% year over year. Breaking that down, we find that domestic cash trading average daily volume (ADV) in the quarter at the NYX was down 23% to 1.8 billion shares traded from 2.3 billion in the first quarter of 2011 and decreased 16% from the fourth quarter of 2011. That year-over-year decline in trading volumes continued into both April and May for the NYX with cash trading ADV down 13.3% in April and 9.3% in May. The net effect is year-to-date U.S. cash products handled ADV of 1.8 billion shares, down 18.5% from prior-year levels. ...346 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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