Props Forge Ahead

Terry Flanagan

Regulation and volatility have become the primary driver in the recent rebirth of proprietary trading.

When the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress, many industry participants viewed it as a game changer that would have a negative impact on proprietary trading. After all, the Volcker Rule, embedded within Dodd-Frank, was aimed at taking down bulge bracket prop desks.

And while many of the banks have spun off their proprietary trading desks, senior traders are now opening up their own shops and going back to basics. The industry isn’t heavily regulated as the traditional buyside community and helps retain a level of privacy not even enjoyed by the largest hedge funds.

Former Goldman Sachs employee Piere-Henri Flamand, who ran the firm’s prop unit, recently struck out on his own along with other top traders at Deutsche Bank and Morgan Stanley. Traditional asset management firm Guggenheim Partners is set to fully launch its Global Trading prop unit this autumn with up to $2 billion in capital.

Volatility across all asset classes in recent months has also boosted prop trading revenue as traders find more strategies to deploy across different markets.

“Volatility is back in the marketplace,” noted a Chicago-based proprietary trader. “Volatility begets volume, and the Chicago proprietary trading community has been a big part of that volume. It’s across all asset classes, but seems to be spurred mainly by global macro concerns much like 2008’s markets – only at a currency/sovereign level instead of a financial institution level.”

“Currency instability spreads across everything from corn to oil to gold to individual equities – because like it or not, everyone directly or indirectly has currency risk of some sort and everyone looks to the futures market to hedge that risk in the appropriate instrument, giving the prop shops increased flow to trade against,” they added.

Related articles

  1. The proposed rule kills the goose that lays the golden egg.

  2. From The Markets

    Spoofing Conviction Upheld

    US Appeals Court will not overturn Coscia conviction.

  3. Regulators eye funds operated by foreign banking entities.

  4. STA/Jones Trading - Who Begets Liquidity?

    MiFID II and a proposed law could change trading dramatically.

  5. Regulation, Liquidity Top Bond-Trader Concerns

    President Trump has railed against the regulation, though repeal seems highly unlikely.