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Proprietary Trading Roles Shaken Up In Run-Up To Volcker Rule

Traders' roles at many large institutions are being redefined and in some cases relocated within firms amid Wall Street's efforts to deal with the Volcker Rule's pending ban on proprietary trading of certain securities.

While Paul Volcker grouses that Congress watered down his original proposal, banks appear to be taking it seriously. As financial reform legislation that includes a partial prop-trading ban heads toward a final Senate vote, The Wall Street Journal observes:

Banks are scrambling to find new positions for star proprietary traders, who basically trade company money in hopes of fattening bank profits and their own paychecks but could become an endangered species once the rule takes effect.

Among examples it cites, Citigroup "is considering" switching more than 20 prop traders to desks that trade with clients. Both Morgan Stanley and Deutsche Bank each have at least one one former prop-desk trader "betting" each institution's capital while working on a client trading desk.

Another tactic: relabeling prop traders as "corporate derivatives" traders, traditionally a client trading role. "It isn't clear if regulators will see the shifts as anything more than sleight of hand," the WSJ remarks. It also notes that placing prop traders on desks that handle client orders will exacerbate long-running client concerns about front-running.

The story acknowledges the inherent ambiguity between client trading and proprietary trading:

Many expect an increase in risk-taking in trading operations that cater to clients as traders build an inventory of stocks and bonds to meet demand from hedge funds, money managers and other customers....

Does (the proposed ban) mean a trader can't buy a bunch of bonds in anticipation that investors would want to buy them a week later at a higher price? What if the trader holds the bonds for a month or two? Such scenarios make it difficult to draw a clear line between proprietary trading and the sort of client-centered trades typically handled by separate desks at most firms. Regulators could take years to establish clear rules. They expect Wall Street firms to push for more risk-taking as they test the limits of new rules, say people familiar with the matter.

Despite an industry-wide trend to de-emphasize proprietary trading even before the Volcker Rule was proposed, several bulge-bracket institutions still have large prop-trading operations.

Goldman Sachs, for instance, reportedly manages an estimated $9 billion through two such desks - a "special situations group" with in its fixed-income division, and "principal strategies" desk within the equities division. Bank of America reportedly has a 60-member prop trading team with about $3 billion in capital. And Citi, despite losing several prop traders to hedge funds after the Volcker Rule was announced, "still has several proprietary-trading desks with about five different strategies," the WSJ says.

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AUTHORJon Jacobs Insider Comment
  • Ro
    Roomba2
    13 July 2010

    "(commercial bank) proprietary traders........could become an endangered species"

    Comment One: Oh well...guess you guys have to make a living without a subsidized balance sheet (not just Fed money). Let's see what you can really do.

    "placing prop traders on desks that normally handle client orders will exacerbate long running client concerns about front-running"

    Comment Two: Absolutely! Client business would evaporate and there will be no business. There is no way to keep the prop traders. I am sure there is a place in hedge fund world. That's where they should be anyway. Everyone else is "restructuring", why not the finance industry?

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