Goldman's rotten trading quarter is a familiar smell on Wall Street

Big Wall Street banks have spent billions of dollars and untold man-hours in recent years transforming their trading desks from hedge-fund like operations trading on their own account into market-making businesses offering a price based on what customers want to buy or sell. 

But the shift in business model, prompted by reforms following the 2008 financial crisis, has done little to shield banks from suffering big losses when markets move against them, traders and risk managers told Reuters this week. 

Goldman Sachs Group Inc’s (GS.N) second-quarter results, which saw earnings rise to $3.95 per share from $3.72 in the same quarter last year, also included the worst commodities trading quarter in its history as a public company, prompting a 2.8 percent fall in the bank's stock in the last two days. 

Bad inventory positions based on wrong expectations of customer demand were partly to blame, Chief Financial Officer Marty Chavez said.

Goldman is not alone. In recent years, banks including JPMorgan Chase & Co (JPM.N), Citigroup Inc (C.N), Barclays PLC (BARC.L) and Deutsche Bank AG (DBKGn.DE) have all suffered losses from currency moves, interest rate positions, or misguided bond market bets. 

Under the so-called the Volcker rule, which was intended to limit proprietary trading, banks are now required to prove they are only holding enough inventory to meet "reasonably expected near-term demand." 

The rule was implemented in response to the 2008 financial crisis, when Wall Street banks fueled problems in the mortgage market by making speculative bets with their own money. 

But one of the Volcker rule's unintended consequences has been to drain liquidity in certain markets, which has made it more expensive and difficult for banks to source inventory for clients or manage their own risks. 

New rules defining the amounts of capital banks must hold have made it more expensive for them to hold certain types of assets, while a long period of low volatility in some markets has made it trickier to gauge when trading activity will suddenly rise.