Mystery of Disappearing Proprietary Traders: Michael Lewis By Michael Lewis - Sep 29, 2010 Bloomberg Opinion In the run-up to the vote on the financial overhaul bill, the big Wall Street banks squashed an attempt by Senator Carl Levin to pass a simple ban on any form of proprietary trading. A Senate staffer close to the process told me the amendment was one of Wall Streetâs highest priorities, spreading money around to exert as much pressure as possible. It worked: Levinâs amendment never reached the Senate floor for a vote. The final version of the bill restricts proprietary trading but allows big Wall Street firms to invest as much as 3 percent of their capital in their own internal hedge funds. How exactly the new rules are enforced is left to regulators inside the Federal Reserve, but itâs not hard to see how a wholly owned hedge fund might become a proprietary trading group, with a different name. The 3 percent loophole amounted to an invitation for the big banks to keep on doing at least some of what they had been doing -- which is why Levin felt compelled to remove it, and the banks fought so hard to keep it. Yet in just the past few weeks news has leaked that Morgan Stanley, JPMorgan and Goldman Sachs all intend either to close their proprietary trading units or to sell their interests in the hedge funds they control. Obviously, something is wrong with this picture. Why fight for a right, and win, only to proceed as if you have lost? Why take prisoners only to surrender to them? Having preserved their loophole the big American banks now appear to be freely abandoning any attempt to exploit it. (Credit Suisse, on the other hand, just bought a stake in a hedge fund.) Shark Watch To see Wall Street turn its back on money is as unsettling as watching a sharkâs fin veer away, and then sink from view. It leaves you wanting to know where the shark has gone, and why. None of the firms have offered a good explanation for their new and seemingly improved behavior, but itâs not hard to think up several. From least plausible to most: No. 1 -- Having not merely preserved but bolstered their place at the heart of capitalism -- with little banks failing everywhere, the big keep getting bigger and stronger -- the major Wall Street firms have experienced an epiphany about their relationship to wider society. They donât need to screw people! Newly able to raise their prices, they want to return to serving their customers, rather than exploiting them. Whatever they lose from prop trading they will be more than compensated for through new and more trusting relationships with their clients -- who will now have no reason to suspect they are merely a tool for the firmâs trading desk. Nice Guys In a smaller and less competitive financial industry, it will pay to be the nice guy, and so Goldman Sachs now wants to play nice. The only problem with this explanation is that I donât believe it. More likely: No. 2 -- The big Wall Street firms have looked anew at proprietary trading and seen a dying business. For a start, their proprietary traders, put off by subpoenas and government inquiries and the new internal aversion to short-term pain on big trading positions, are fleeing for the privacy of hedge funds. But the exodus of trading talent is only part of the problem. A general malaise has come over the world of big time financial risk taking. Everywhere you look hedge funds are either closing or shedding employees or, most shockingly, cutting their fees. At the bottom of this depressing new trend lies a deeper problem: a scarcity of suckers. Find the Fool The proprietary trading business turns in part on oneâs ability to find the fool -- to find people willing to take the stupid side of the smart bets you are placing. One of the side effects of our seemingly endless financial crisis is to wash a lot of fools, many of them German, out of the game. Itâs as if a casino owner awakened one morning to find the tourists had all gone, and the only remaining patrons are pros counting cards at his blackjack tables. As he looked around his casino, for the first time in his life, he couldnât find the fool. And the first rule of the casino business is: if you donât know who the fool is, itâs probably you. Prop trading isnât as promising as it used to be. At the same time itâs a far greater nuisance than it ever was: The regulators might actually be paying attention to what your traders get up to; if they screw up the financial press is poised to write a story about them; and so on. Not Worth It Itâs just not worth the trouble to prop trade, unless you can prop trade in some wholly novel way. Which brings us to a third possible explanation: No. 3 -- Goldman Sachs, Morgan Stanley and JPMorgan are not in fact abandoning proprietary trading. They are just giving it a different name. They are dismantling the units called âproprietary tradingâ and shifting the activity onto trading desks that deal directly with customers. (Which would explain why so few prop traders are being let go.) After all, you donât need a proprietary trading desk to engage in the two activities that any proprietary trading ban would seek to prevent: 1) running huge trading risks, and 2) taking the other side of the customersâ stupid trades. Goldman Sachsâ infamous Abacus program -- the one that talked American International Group into selling vast amounts of cheap insurance to offset subprime mortgage risk, and then shorted the instruments they themselves had created -- wasnât dreamed up by the prop trading desk. It was the brainchild of what customers knew as the âClient Facing Group.â In short, there are any number of explanations why Wall Street firms are all at once letting it be known they intend simply to walk away from what has been, until very recently, their single most lucrative line of work. None of the Above The answer may be none of the above or some mixture of the three. But whatâs really striking is how little ability the outside world retains to find out what is going on inside these places -- even after we have learned that what we donât know about them can kill us. It would be nice to know, for instance, if the big banks are making these moves with the tacit understanding that the regulators, going forward, wonât be looking too closely at the activities of the âClient Facing Group.â And yet news of the death of the Wall Street prop trader has been greeted with hardly a peep. And I wonder: is this the nature of our new financial order? Big decisions, in which the public has a clear interest, being made outside public view, with little public discussion or understanding. If so, it isnât a future at all. Itâs just the past, repeating itself. (Michael Lewis, most recently author of the best-selling âThe Big Short,â is a columnist for Bloomberg News. The opinions expressed are his own.) http://www.bloomberg.com/news/2010-...hael-lewis.html
volume is at least 50% less than 2008 before the financial meltdown. these prop trading desk in the banks make money on volume too much risk to take a position so they'll go back to the management fee and commission model..not as profitable as trading their own accounts. the regulations on prop trading is not worth since they will be monitored and fined.
I'm going to rip Lewis a new asshole about this article, because I've been reading his books since Liar's Poker, and other than Mr. Washington Post himself, Bob Woodward, being the biggest shit-disturber in modern publishing, Lewis is a close second in the parasite category. I do think he nails it with the shark metaphor. They're just taking a rest right now until the bait fish return, because they always do. Jim Cramer was saying the other day how the boomer generation has abandoned the stock market for being more risk averse looking into retirement. The flaw in that is the boomers are why the markets have been so corrupt, boomers being greed personified as a generation. They'll be back once the bull turns around, and they'll remortgage their homes again, or keep selling, because they'll have nowhere else to "safely" invest their mountains of cash and pension payments (especially in Canada) other than stocks. Suckers don't get wiser; they just get greedier. The opinions expressed in this post are my own. I just don't need to be published on wsj.com to validate my theories to know prop trading is nothing of dead, it's just lurking below the surface waiting for the next feeding frenzy, only this time, there are Orcas circling the perimeter. Swim at your own risk.
Interesting read, thanks guys.....my Bloomberg page kept exploding, but I finally got the link to work. According to my friends at GS, yes they are "re-inventing" themselves to address many of the issues facing the industry today. I don't for a minute think that they either "found Jesus" or had any sort of epiphany, merely another direction to follow. I am always optimistic about the future, and figure for any doors that close, others will open. As I mentioned previously, I would prefer not to do battle against any big bank prop desk....however, I do have to agree that much of the "dumb money" has stepped back from the game, at least for the time being. At first review, I liken the last year to my weekly Saturday poker game that my brother and a few others play at the Palms. We have a nice game ( $2 $5 blind with a mandatory "Hard Rock Straddle" of $10 to $50, bringing the blinds up)....sometimes we have visitors from California who may not be quite as proficient as some of the locals - tend to bet more, more risky types. But, sometimes it is the same 9 guys who know each other's play pretty well. Both can be good games, but the "harder" is the one where you know everyone....so, more than ever, we must be aware of who we're competing with in this trading game of ours. I prefer Mutual fund managers, and many hedge fund managers leaving money on the table for our traders vs. having to compete with the big banks.... FWIW, Don
I tend to agree, and from my first and favorite book on gambing and life (I read when I was about 16), by Minnesota Fats - telling his stories of how to "beat the suckers" during the depression times.....:"you can't hustle someone who doesn't think they're hustling you or someone else" (paraphrase). The Bank Shot and Other Great Robberies: The Uncrowned Champion of Pocket Billiards Describes His Game and How It's Played [Paperback] Minnesota Fats (Author), Tom Fox (Author), R. A. Dyer (Introduction) http://www.amazon.com/Bank-Shot-Other-Great-Robberies/dp/1592287018 Over the years I've found that if you spend as much time trying to do things correctly, as trying to find a short cut, you're much better off mentally (and financially for the most part...but so many are searching for the quick buck). All the best, Don
Hey Don, Ever hear of Virgil Grumpke? He was a contemporary of Fats... used to hang out in a pool hall in St. Charles, Mo. He always wore a smile, coat and tie. I remember telling a guy, "watch this old guy play"... my friend said, "what's so great about him.. all he does is shoot short, straight-in shots"... Hahahaha!
Gambling in other games, be it poker or pool, is a great metaphor for trading the financial markets. Just different degrees. I can say I regret not just buying MSFT in 1984 when I bought my first PC. Why I didn't, I somewhat blame my father for not teaching me the wisdom of time and his experiences in trading the markets himself from the newspaper all those years trying to get ahead and out of the commercial construction industry game. If he'd told me what he knew then, we'd both be rich(er) today. That said, I still have time to "correct" my mistake by buying into the next big thing, but he doesn't. Lesson learned the hard way.
Very cool you do this. I used to fly to Vegas every other weekend from SFO to blow (it was free money to lose those few years) my options and bonuses. But we were short-sighted, arrogant 20 something pricks thinking we ruled the world. Looking at how the Internet rules our lives now, I guess we were. I miss those days. I would love to be in a weekly game with my mates again, but they've all fled to other pastures.