They’ve been accused of generating market anomalies, too much risk taking, and an ever present conflict of interest.
We are, of course, talking about institutional prop trading desks.
And it seems President Obama may have now pinned them down as the hub of unhealthy business practices in banking. As the FT reported on Thursday:
President Barack Obama is set to toughen his approach to Wall Street regulation on Thursday, announcing limits on the size of proprietary trading operations in the second broadside against banks this month.
Mr Obama will make his remarks after a meeting with Paul Volcker, the White House adviser and former Federal Reserve chairman, whose more far-reaching vision of curbing banks’ riskier activities has been sidelined until now in favour of reforms drafted in the Treasury.
Which presumably is enough to make any investment bank quiver in its boots.
Of course, it’s hard to tell at this stage what the effects will be. First, we don’t have the full details yet. Second, most banks do not break down the contributions of their prop trading desks in income statements.
That said, it’s fair to assume they’re sizeable enough.
According to the ZeroHedge blog, Goldman Sachs has stated publicly its prop trading accounts for 12 per cent of net revenue. So that would be 12 per cent of an expected $9.65bn worth of revenues generated in the last quarter alone, according to analysts forecasts compiled by Bloomberg ahead of Thursday’s earnings release.
Meanwhile, a clue to the upcoming clampdown on prop trading activities might have come in the CFTC’s move last week to restrict position limits in energy markets.
The regulator drew up proposals which — relatively unexpectedly — targeted speculative trading desks of institutions alongside funds that had been more commonly blamed for the run-up in energy prices in 2008.
Related link:
Is the CFTC trying to restrict physical traders after all? – FT Alphaville