NYX Nyse Euronext

Lower U.S. equities trading volume and falling stock prices are hitting Wall Street's equity trading desks, prompting talk among traders in recent weeks about layoffs later this year if the situation doesn't improve.

At an industry conference in New York on Thursday, Stifel Financial Corp. (SF) Chairman and Chief Executive Ronald Kruszewski warned investors the firm has "seen a deceleration across almost all of our businesses" in the second quarter.

Generally speaking, he added, given the challenging environment, Wall Street's big banks "will retrench."

Anecdotal evidence of a slowdown is mounting. Recruiters report they are getting less interest from banks who were once bulking up in areas like institutional equity sales and trading and are instead reassessing their headcounts and not filling open positions.

"We are definitely seeing a pullback across the board," said Deborah Rivera, founder of New York executive-search firm the Succession Group, who recruits primarily for hedge funds and bulge-bracket firms.

Demand for "straight investment bankers" who provide advice on mergers and acquisitions is strong, but as for staffing levels in other businesses, "there has really been a sense of worry over the past two or three months," she said.

The traditional times to cut staff in underperforming divisions are the third and fourth quarters, when the slashing can be done before performance bonuses have to be paid. Already some banks are trimming staff, including Barclays PLC's (BCS, BARC.LN) Barclays Capital investment-banking division, which cut 50 employees earlier this week in its equity sales, trading and research groups.

A person familiar the matter said the cuts were not related to revenues and characterized them more as a ritual culling after three years of growth in the business following the firm's acquisition of Lehman Brothers Holdings Inc.'s (LEHMQ) U.S. brokerage operations.

Declining equities activity comes at a challenging time for banks, who are already coping with sluggish revenue and higher regulatory and capital demands.

Earlier this week, Morgan Stanley (MS) announced new cost-cutting moves designed to help it save about $500 million beginning next year, and up to $1 billion in the next three years. Even levels of BlackBerry use are on the table.

The company currently has no plans to cut any employees in its investment banking and trading unit, according to a person familiar with the situation.

But Morgan Stanley, which has a controlling stake in Wall Street's largest retail brokerage, did say its headcount in Morgan Stanley Smith Barney, its brokerage joint venture with Citigroup Inc. (C), may fall below its previous target of 17,500 to 18,500. That implies a possible reduction of at least 300 brokers.

Trading volume, which helps juice commissions for broker-dealers, is declining. On NYSE Euronext's (NYX) New York Stock Exchange, for example, volume is down 20% so far this year from 2010 levels and is down 25% so far in June compared to last year.

"Dodd-Frank drove large investment banks like Goldman Sachs and Morgan Stanley completely out of proprietary stock trading," said Dave Cummings, chairman of Kansas City-based Tradebot Systems Inc., a high-frequency trading firm. "This is completely nuts!"

J.P. Morgan Chase & Co. (JPM) research on Monday estimated that market volumes are down 11% from the first quarter, which will translate into a 12% average decline in revenues from equities for global banks. That business level is still better than fixed income, which is expected to be down another 21% from the first quarter, J.P. Morgan said, due to slower client business, especially in commodities.

Goldman Sachs Group Inc.'s (GS) chief financial officer told analysts at Susquehanna International Group recently hedge funds are taking their lowest level of risk in years.

That said, Goldman isn't taking any short-term actions to adjust headcount, Goldman's David Viniar told Susquehanna analyst David Hilder.

Goldman's equities revenues fell 7% in the first quarter, reflecting lower revenues in client execution, which is trading.

Equity flows to mutual funds are also soft. Funds investing in domestic stocks have had outflows of nearly $4.8 billion for the quarter through May 18, according to data from the Investment Company Institute.

Hedge Fund Research said Tuesday that hedge fund performance slipped 1.28% in May, less than the Standard & Poor's 500 and Dow Jones Industrial Average, which saw respective drops of 1.35% and 1.88%, while the Nasdaq Composite Index fell 1.33%.

-By Liz Moyer, Dow Jones Newswires; 212-416-2512; liz.moyer@dowjones.com

--Steven Russolillo contributed to this article.

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