Macaskill on markets: Prop traders forced to seek pastures new
The trickle of proprietary dealers out of investment banks could become a flood in the coming months. This will provide a welcome diversification of sources of market risk-taking as traders end up at corporations and sovereign wealth funds, as well as the obvious destination of hedge funds. A broadening of the range of institutions actively trading across asset classes should help to offset a reduction in liquidity resulting from the death of the traditional bank prop desk.
Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks
There is still likely to be a net reduction in liquidity, however. And shareholders should not expect a sudden smoothing of results from the sales and trading divisions of investment banks. The main dealers have already anticipated regulatory changes to ensure that they can continue to take risks by keeping hedging decisions intertwined with client flows. The collapse in equity sales and trading revenues at Goldman Sachs in the second quarter is unlikely to be the last nasty shock for shareholders from a botched hedging decision.
Goldman is among the US banks that have begun to send signals that their standalone proprietary dealing desks will be shut down well ahead of the schedule set by the portions of the proposed Volcker Rule that made it into the final Dodd-Frank legislation to overhaul financial services. With JPMorgan and Morgan Stanley hinting broadly at a similar move and individual traders anxious to get a head start on their peers in securing other sources of capital to bet, the last rites are being read for old-fashioned bank prop trading.