Two weeks ago on an afternoon visit to New York City, I was struck by the changed tone, atmosphere, and demeanor during the meetings I had with a number of Wall Street professionals. The fact that the tone has changed does not necessarily mean that the industry as a whole is entirely chastened by the failings—if not worse—both going into and coming out of the crisis. Without deeply meaningful efforts and accompanying results to promote real transparency and increased disclosures, the industry will continue to fight to maintain ‘business as usual.’ It is an uphill battle.
Further evidence of this reality is provided today with the news that JPMorgan Chase (JPM) is shutting down its proprietary trading operations. Bloomberg reports, JP Morgan Said to End Proprietary Trading to Meet Volcker Rule:
JPMorgan Chase & Co. told traders who bet on commodities for the firm’s account that their unit will be closed as the company, the second-biggest U.S. bank by assets, starts to shut down all proprietary trading, according to a person briefed on the matter.
The bank eventually will close all in-house trading to comply with new U.S. curbs on investment banks, said the person, who asked not to be identified because New York-based JPMorgan’s decision hasn’t been made public.
Closing the proprietary trading desk for commodities affects fewer than 20 traders, one in the U.S. and the rest in the U.K., the person said. The unit is based in London, and traders there were given notice on Aug. 27 that their jobs were at risk as required by U.K. law, according to the person. Proprietary traders in fixed-income and equities, who account for 50 to 75 employees, will need to find jobs when those desks are shut down, this person said.
What are the implications of this move? For JP Morgan, lessened revenues. Too bad. I have little sympathy. For the employees, obviously lost jobs. The more talented traders and dealmakers will likely land at hedge funds. The lesser talented will likely have a tougher time finding employment. I do sympathize. For the market as a whole, this trend toward lessened — if not fully eliminated — proprietary activity has significant implications. Such as? Prop trading has traditionally been some of the most active trading in the market. With prop trading gone, overall trading volumes will decline. This is all part and parcel of the ongoing deleveraging process. While banks may whine about lessened credit availability to customers, the fact is prop trading had little to do with credit availability. In fact, the elimination of prop trading should allow capital to be redirected toward greater credit availability. Prop traders may whine about higher transaction costs for customers in light of lessened volumes. My response is that if the regulators were truly concerned about transaction costs (bid-ask spreads) and capable of effecting change, all they really need to do is bring real transparency and disclosures into the process.
Information is everything.