They finally passed the Volcker Rule yesterday and both sides claimed victory. That’s how you know little was done. The end effect is more bank traders will be out of jobs and the cost for banks to trade will be higher.
They didn’t fundamentally change the game.
Dodd-Frank didn’t do anything except kill community banking, eliminate big bank competitors and allow the Feds to probe deep into individual accounts they deemed “at risk”. Volcker doesn’t do anything to change the way we trade.
Banks still will have an edge.
If we want to change the face of trading, the structure of the market place must be changed. Customers need to be closer to the market, and everyone ought to compete in the same pool.
Here is what they should have done:
1. Force banks to decide if they want to be in the order filler business or the trading business.
2. If it’s order filler business, then their role would be to represent the customer and get them the best fill for their order. They could charge a fee for service.
The order filling business is highly profitable if there are constraints to the distribution chain. For example, the old specialists at the NYSE rarely if ever lost money. Order fillers on the top step of commodity exchanges reaped huge low risk rewards. It wasn’t easy money, but it was less risky than speculating.
3. If it’s the trading business, they give up their customer business. Essentially, they become a hedge fund. For the big banks, they could still keep their advisory, consulting and M+A activity. But, if they want to trade, handling customer business would go bye bye.
There are plenty of other things they can do to make markets more competitive and flatter. I have covered it from time to time in this blog. But, the will of the industry to do it isn’t there because the money that flows into their bottom line from keeping a hierarchy is too great.
This was just legislation and regulation passed because of envy. It does nothing to make markets safer. It will not stop the next downdraft. Banks will still mint millionaire traders (not that there is anything wrong with that).
Here is a good quote from the WSJ article.
“I sat in the middle of a trading room for the first 28 years of my career, and it’s very hard to distinguish between market-making and proprietary trading,” said Thomas Strauss, vice chairman of Cowen Group Inc. and a former president of Salomon Brothers. “In the end, you need risk takers.”
While many trumpet passing of the Volcker Rule, the true risk takers in the industry know it will do nothing. The cost of playing poker just went up. Kind of like eating a bag of potato chips. Tastes good going down, but you know in the end it’s really bad for you.