Goldman Sachs Group (GS), the former investment bank known for aggressive risk taking, is facing a frontal assault on its traditional dominance of fixed income trading from an unlikely source: commercial bank JPMorgan Chase & Co (JPM).

In third-quarter earnings reports this week, Goldman Sachs said fixed income trading revenue fell from the second quarter, while JPMorgan said revenues at its equivalent unit climbed.

The results are feeding speculation that JPMorgan, the second largest U.S. bank by assets, could use its cheap deposit funding to challenge Goldman's investment banking dominance, as that bank faces higher funding costs in capital markets.

JPMorgan had already outmatched Goldman Sachs in league tables for global underwriting. But few analysts or investors had expected the bank to post a modest improvement in trading revenues while trading superstar Goldman reported a slip-up.

It looks as if JPMorgan now has a substantial advantage in the marketplace over its competitors and it's utilizing it, said Richard Bove, analyst with Rochdale Securities.

Goldman's fixed income trading results slipped to $6 billion from $6.8 billion in the second quarter, while JPMorgan said on Wednesday that fixed income trading climbed slightly to $5.01 billion from $4.93 billion in the second quarter.

Both banks benefited from an uptick in the value of securities they had written down a year earlier and it is possible that JPMorgan, typically more conservative, may have more harshly marked down securities that it has now marked up. Analysts said this is hard to assess accurately since the banks do not disclose exactly which securities' values have changed.

BLACK BOX

JPMorgan reported a $400 million gain in the value of securities in its fixed income unit, compared to a $3.6 billion write-down in the same period a year earlier.

Goldman also said on a call with analysts that it also saw improvements in securities' values, but Chief Financial Officer David Viniar did not give any details about fixed income. In the year-earlier quarter, Goldman had losses of $1.1 billion on residential and commercial mortgages and securities and credit products.

JPMorgan's lift from fixed income in particular had led analysts and investors broadly to expect a similar or larger jump at Goldman -- and the former investment bank's shares slid 1.2 percent, in part reflecting these higher expectations, analysts said.

It is difficult to compare different banks' results, Viniar said when quizzed by reporters about JPMorgan's apparent third-quarter improvement compared to Goldman's slip in fixed income trading.

Fixed income, which for Goldman also includes currency and commodities trading, is something of a black box for both banks. They may include different securities and businesses within the category and neither gives a clear breakdown of what the units include.

Both banks are widely regarded as the best survivors of the financial crisis, although they have not escaped unscathed. JPMorgan has battled mounting losses on consumer loans and Goldman Sachs last fall converted to a bank holding company -- and trimmed its balance sheet as a result -- after Lehman Brothers failed and regulators worried about the survival of investment banks that relied on borrowing for funding.

Still, the third-quarter results appear to show the gap is narrowing between former investment bank Goldman and commercial bank JPMorgan.

(Reporting by Elinor Comlay; Editing by Richard Chang)

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