Props to Hedges

Terry Flanagan

As the looming Volcker Rule weakens prop-trading desks at bulge-bracket banks, the exodus to hedge funds and start-ups continues.

Delays in finalizing specifics of the Dodd-Frank Wall Street Reform and Consumer Protection Act have postponed the Volcker Rule’s official debut, but even as a proposal the regulation has altered the landscape of proprietary trading.

The Volcker Rule aims to reduce the chance of banking blowups, and by extension systematic pullbacks in lending, by prohibiting banks from engaging in proprietary trading or owning stakes in proprietary trading businesses. Proposed in early 2010 by former Federal Reserve Chairman Paul Volcker, the rule continues to cause dislocation as banks and individual traders seek to get out ahead of implementation.

“In light of financial regulation, there is a pool of jobless talent,” said Geoff Cole, senior manager at technology provider Sapient Global Markets. Prop traders “are going to small or mid-sized hedge funds, or starting their own hedge funds.”

Just last month, Sutesh Sharma of Citigroup’s Principal Strategies prop-trading unit moved to start his own hedge fund, Portman Square Capital. Sharma is the latest in a procession of prop traders who have left bank desks to start their own ventures, following high-profile names such as Pierre-Henri Flamand and Morgan Sze of Goldman Sachs and Benjamin Fuchs of Nomura.

The biggest Wall Street banks have always been launching pads for entrepreneurs, as comparatively attractive job security and benefits at firms such as Goldman and Morgan Stanley can be trumped by the allure of building your own business. As regulation dims the appeal of trading on bank desks, the balance has shifted decidedly in favor of small shops.

“Prop traders have been leaving bulge-bracket firms for ten years,” said Evan Rapoport, chief executive of HedgeCo Networks, a hedge-fund research and service provider. “Financial regulation has increased this.”

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