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After stories of prop desk closures but no confirmation from the bank itself, Goldman Sachs’ 10-K reveals the bank has liquidated “substantially all of the positions” in its Principal Strategies unit and has begun liquidation of positions in its global macro unit.The SEC filing shows the closures are direct responses to Dodd-Frank financial regulation, and specifically the Volcker Rule, which reduces the percentage of the bank’s capital with which it can make bets.
The bank said that, “in light of the Dodd-Frank Act, during 2010, we liquidated substantially all of the positions that had been held within Principal Strategies in our former Equities operating segment, as this was a proprietary trading business.”
As for the other desk, “during the first quarter of 2011, we commenced the liquidation of the positions that had been held by the global macro proprietary trading desk in our former Fixed Income, Currency and Commodities operating segment,” the firm said.
Net revenues “were not material for the year ended December 2010” for either unit.
The Global Macro Prop Trading, which has historically been a huge earner for Goldman, was made up of eight employees. Some of them will leave the firm, while Karl Devine and his four London-based traders are in talks to move to hedge funds there — perhaps Brevan Howard.
Morgan Sze, the global head of principal strategies, launched his own Hong-Kong based fund in December last year with 12 Goldman prop traders. Others went to KKR. The former head of the desk, Pierre Henri Flamand, retired from the bank and started his own hedge fund too.
But it’s important to note, as we have before, that though Goldman (and other banks) are shutting prop desks to comply with Fin Reg, it doesn’t mean that they’ve shut down the practice of trading with the bank’s cash altogether — they’ve just figured out how to get around the Volcker loophole: shut down the prop desks and use client-based units to trade the bank’s capital.
Bankers haven’t been quiet about their intention to take on proprietary positions without flouting the new rules.
In fact Morgan Stanley, which is currently in the process of spinning off one of its prop-trading groups, Process Driven Trading, may convert its Equity Trading Lab — another prop desk — into an electronic client-trading unit.
Also, though Goldman has shuttered or almost shuttered Global Macro and Principal Strategies, that still leaves another prop desk: the highly lucrative Special Situations.