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Goldman has moved about half of its “proprietary” stock-trading operations into its asset management division, where these traders can talk to Goldman clients and then place their market bets…
By having the traders work in asset management, where they will take market positions while dealing with clients, Goldman believes it can meet the rule’s mandates, avoid large-scale layoffs and preserve some of the same risk taking that has earned it enormous profits, people close to the firm say.
A Goldman spokeswoman wouldn’t comment to FOX, so we’re unsure of how prop traders roles differ now that they’ve moved to the client side.
It seems like Goldman isn’t just circumventing the rule, but actually changing the role of prop traders. You’d assume that instead of trading with the firm’s money on prop trading desks, the traders will be trading with the firm’s clients’ money on the asset management team.
But proprietary trading can easily become related to client operations and very closely resemble the prop trading done on strictly defined “prop trading” desks. Thanks to a line in the Volcker Rule which specifies trading “operations unrelated to customer operations,” as long as the “prop trading” is done for client-related purposes, it’s OK.
If it’s done through the asset management side of the business, in which some outside clients are permitted to invest, prop trading might be considered client-related trading. And if they are invested in the firm’s hedge funds, the firm’s own employees might even be considered clients and allow prop trading to occur more freely within the firm.
Or the traders’ new focus might be on off-setting client’s trades with trades of Goldman’s own, rather than trading directly with clients, which is what gave Goldman a reputation for betting against clients during the financial crisis.
Perhaps the provisions of the Volcker Rule allow traders to continue to trade with the firm’s money if they’re “making markets” (aka balancing client trades, or hedging their exposure to client trades), which is usually necessary.
Anyway, we won’t know for sure yet. But this change from prop trading to client trading is happening in many banks thanks to that line in the Volcker Rule which specifies trading “operations unrelated to customer operations.”
Like Goldman, Bank of America is changing how its prop traders trade firm money. A spokeswoman told Fox, that most of BAC’s “prop trading” team now involves dealing with customers, as opposed to traders coming up with their own market ideas and then using firm capital to trade.