According to sources, losses in Goldman’s U.S. non-linear gamma interest rate trading desk were a key factor behind the roughly $1 billion shortfall in first-quarter results compared with analyst expectations. Gamma trading involves speculating on how option risk exposure changes as underlying asset prices fluctuate.

This desk operates within Goldman’s Fixed Income, Currency, and Commodities (FICC) division, which reported disappointing results. Revenue from the division came in at $4 billion, down 10% year-over-year and more than $800 million below expectations.

The losses occurred at a time when several large multi-strategy hedge funds, typically known for stable returns, also suffered losses in March. Volatility driven by Middle East tensions disrupted energy, bond, and equity markets, forcing traders to unwind crowded positions and triggering broader market reactions.

Goldman’s CEO defended the firm’s fixed income trading business, arguing that analyst expectations had been set too high. However, the firm’s equities trading division significantly outperformed, generating $5.33 billion in quarterly revenue — the highest ever recorded for stock trading by any Wall Street bank.

Meanwhile, as earnings reports continue this week, most of Goldman’s peers have reported stronger-than-expected performance in fixed income trading.

Earlier in March, many banks had expected front-end interest rates to decline, as cooling labor market data led markets to anticipate imminent Federal Reserve rate cuts. However, the escalation of tensions involving Iran drove expectations of higher energy prices, which in turn pushed interest rates sharply higher.

Goldman’s rate trading business is relatively large and serves many top hedge funds and institutional investors, making it more sensitive to geopolitical shocks compared to some peers. By contrast, JPMorgan also saw a decline in its rate trading revenue, but its lower reliance on the segment allowed its overall fixed income division to post a 21% increase in revenue.

Market Interpretation:

Goldman’s CFO attributed the decline in fixed income trading revenue to significant weakness in interest rate and mortgage-related trading, while noting strong performance in foreign exchange and commodities. In fact, the firm’s commodities business saw revenue increase by more than 60% year-over-year, in line with strong performance across Wall Street.