By Andrew Actman
Lightspeed Chief Strategy Officer
This year will go down in financial history as the era of governmental meddling in the economic system. Not since the aftermath of the Great Depression has such sweeping regulatory overhauls been proposed. Driven by fear of a repeat of 2008′s meltdown, politicians have scrambled to institute supposed safeguards to prevent another seizing of the economic machine. In an almost mirror image of the 1930’s, scapegoats are being targeted as the cause of the debacle.
In the ‘30s it was the short selling speculators who were blamed as the prime movers causing the depression. Today, it’s hedge funds, derivative trading and loose bank lending guidelines that are being held accountable for the economic slide. The public is angry at Wall Street, blaming it for their personal woes. Politicians are riding this sentiment in hopes of being reelected come November.
President Obama has reached out to former Federal Reserve Chief, Paul Volcker, in an effort to build a regulatory framework that will make his administration shine in the light of public sentiment. The President is a strong proponent of the so-called “Volcker Rule,” making it part of the massive financial reform proposal known as the Dodd Frank Bill. This rule will severely curb or ban all together proprietary trading by banking institutions.
Surprisingly, many hedge funds are welcoming this portion of the legislation, their theory being that the rule will radically reduce the amount of capital chasing trading edges thus allow for far greater opportunities for themselves. Some pundits believe that this potential boon to hedge funds will likely be overshadowed by the rest of the 2000-page Dodd Frank Bill. The overall impact to hedge funds remains unclear as this bill will alter the playing field for years to come. Just how the economy will react to each aspect of the Dodd Frank Bill remains to be seen.
Now that a brief overview of the Volker Rule portion of the Dodd Frank Bill has been considered, will it create more opportunities for hedge funds and the various private prop trading groups?
We believe the answer to this question is an unequivocal “Yes.”
According to the Wall Street Journal, Citigroup and other large banks are considering transferring some of their prop traders to desks that deal directly with clients. Obviously, if you take a trader away from his skill set, morale and big paydays are going to decrease exponentially. As you can imagine, this kind of talk is driving traders to seek work at prop trading houses and hedge funds. No one wants to be a glorified customer service representative after building a trading career! Prop trading firms and hedge funds will welcome these highly skilled displaced traders, making it a win-win for everyone. The traders will be able to continue to apply their trade and their employer will benefit from the unique edges brought by the trained and skilled trader. Some firms have actually hired recruiters to attract bank traders who can see the writing on the wall.
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