Goldman Sachs Group Inc. lost its bet that stock market volatility would diminish in the second quarter, just as a gauge of equity price swings surged to a one-year high.
The result was a sharp drop in equities trading revenue, contributing to an overall 82% fall in quarterly profit from a year earlier.
Revenue from its big fixed-income, currency and commodity trading operations also dropped, leaving the company's net income at $613 million, or 78 cents a share, down from $3.44 billion, or $4.93 a share, a year earlier.
Companywide revenue dropped to $8.84 billion, 31% below the first quarter and down 36% from the year before.
In a conference call with reporters Tuesday, Chief Financial Officer David Viniar said, "Primarily in response to our client needs, our equity derivatives business was short volatility entering the second quarter and posted poor results."
The company did not break out the size of the loss or overall results from the equity derivatives group responsible for the business.
The Chicago Board Options Exchange Volatility Index, known as the VIX, is the most widely used measure of volatility. It started the second quarter at 17.47 and rose as high as 45.79 on May 20 before ending the quarter at 34.54.
Goldman, which reported the highest equities trading revenue on Wall Street last year, said the division's revenue slumped 62% in the second quarter from a year earlier, to $1.21 billion.
Clients wanted to hedge against an increase in volatility, Viniar said on the call. "We took the other side because you know we deal with our clients all the time," he said. "We had that position going into the quarter, and volatility just spiked."
"It's kind of hard to fault them for being wrong every now and then," said Alan Villalon, a senior research analyst at FAF Advisors, which owns Goldman shares. "They've kept raising the bar themselves, but there's going to be a hiccup every" so often.