Will the rules prevent Goldman Sachs & Citi from prop trading desks convert to hedge funds?
Citigroup reportedly may move proprietary traders from Citi Principal Strategies to its hedge fund unit Citi Capital Advisors in order to comply with new rules passed with the Dodd-Frank Act, according to Bloomberg. The move, which is one of at least three being considered by the firm, would treat the team led by Sutesh Sharma as hedge fund managers and seed funds before raising money from outside interests thereby complying with new speculation restrictions under the so-called Volcker Rule, said anonymous sources.
A senior analyst at Credit Insights, David Hendler, sees the arrangement as an attempt to a “high-margin” unit within the company, adding that the shift amounts to a transformation from, “an-interest-plus-capital-gain business into a fee business.” Proprietary trading is said to have accounted for 2% of Citigroup’s 2009 revenue, but the change could pose a challenge for firms like Goldman Sachs were the figure is around 10%, although the new rules give banks four years to bring proprietary trading into compliance.
“This may be a way of keeping a high-margin capital- markets business in the fold, within the language of the law,”
“They would be transforming it from an- interest-plus-capital-gain business into a fee business.”
This proves why these guys at institution are geniuses at the cat and mouse game. We will always lost out to the high frequency traders where everything is done automatically or algo based.
Many banks say proprietary trading is a fraction of their total business and that most trades are done on behalf of customers. Such trading accounted for about 2 percent of New York-basedCitigroup’s total 2009 revenue, or about $1.6 billion, a person close to the bank said in May. New York-based Goldman Sachs has said it gets about 10 percent of its revenue from proprietary trading.
In 2007, Goldman Sachs started a hedge fund with about half of the members of its Goldman Sachs Principal Strategies team, which trades stocks with the firm’s own money. That fund, Goldman Sachs Investment Partners investors, remains with the bank and is housed in the money-management division. Some traders who stayed in the principal-strategies unit, including Pierre-Henri Flamand and Ali Hedayat, left Goldman Sachs earlier this year.
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