The ‘Volcker rule’ may be bad news for big speculative investment banks.
It might even be bad news for the inter-dealer brokers like Icap and Tullett Prebon, much of whose business is dependent on offsetting client-risk the big banks can’t internalise themselves.
Panmure Gordon, for example, notes that while Icap estimates some 20 per cent of its trading volume emanates from bank prop desks, that figure probably understates the actual significance of prop to Icap’s flows.
From the broker on Friday:
This is a hard number to pin down since a) banks do not separately report prop trading in their P&L statements, and b) ICAP merely facilitates banks’ dealing flows without needing to determine their clients’ agenda.
Which might explain the move in brokers’ share prices on Friday:
But, on the flip side, it’s good news for market makers and HFT shops.
Groups like Knight Capital flourish when liquidity is low and volatility is high as it justifies their quoting of wider spreads. And it seems the market agrees they’re likely to do very well:
Although, most of that equity surge will have been down to Knight beating consensus estimates on its results on Thursday. The point is the Obama news did not knock the stock to the extent it did others.
Related links:
Was 2009 the year of the market maker? - FT Alphaville