Ted Pick, the global head of sales and trading at Morgan Stanley, just confirmed Wall Street's worst fear: It has been a horrible first quarter in trading.
Pick was speaking at the Credit Suisse financial-services forum.
"The year started out OK. It started out OK for everyone," he said.
More recently, however, markets have gotten choppy. He was asked what trading revenues looked like halfway through the first quarter.
"The question is going to be, with the animal spirits having sort of disappeared here and the classic risk taking mode, whether we're going to continue to see this gapping around, which I think will look more like recent sequential quarters than it would like the healthy first quarter we saw last year," he said.
That comment is critical. The first quarter is typically the most important period of the year for trading desks, as asset managers move into new positions.
If that isn't happening, and the first quarter looks just like the third or fourth quarter, for example, then trading revenues are likely to come in down on the first quarter of last year.

The right kind of volume

Pick added that while equity and bond trading volumes are up, it isn't the right kind of volume.
"I think we'd all argue that some of this volume isn't terribly healthy," he said.
"It is not the classic beginning of the year reinvesting cycle," he added. "It is choppier, it is gappy, it is highly insured volume, and the question is how long are we going to see that for?"
His comments confirm fears that the recent volatility has dented trading revenues. Credit Suisse analysts led by Susan Roth Katzke highlighted the increased trading volumes in a note at the beginning of February, but said it was unclear as to whether that increase in volumes would lead to an increase in profits.
Pick started his interview at the Credit Suisse conference talking about markets more broadly, saying that this is "the finishing phase" of a climb down from well-established market highs.
Morgan StanleyMorgan Stanley
"We know what the three culprits for this violence are," he said. "One is China and its adolescence, two is the relentless decline of crude and its impact on the credit complex and sovereigns. And then three is the Fed, and fear of Fed self doubt."
He said the long-short hedge-fund community had struggled, and were taking risk off the table. As they did so, they were removing levered long positions, but maintaining their levered short positions, turning negative on the market in the process.
"We're certainly in the stages of what feels like some capitulation," Pick said. "Asset managers were selling futures against the market, and that worked until single names started to not work."
Sovereign wealth funds have been quiet since the third question, he said, adding that if the crude oil price hangs around the $30 mark for a while, they might start to sell their assets too.
"The markets feel oversold as a technical matter, but it is hard to have conviction, and for that reason managers are playing close to shore," he said.

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