Simon English: Outlawing proprietary trading is pointless, and will take all the fun out of banking
Thursday 21 March 2013
Outlook "Call for UK proprietary trading crackdown", sang the Financial Times headline a few days ago. In its wisdom, the Banking Standards Commission, a parliamentary watchdog set up to investigate what's wrong with those fellows in the City, said it was high time to "bear down" on so-called proprietary trading.
Prop trading is generally regarded as a source of evil. The notion of banks' betting on their own account with their own money just sounds instantly wrong to most observers.
The BSC didn't call for an outright ban on the practice, but thinks there should be much less of it.
From a journalistic perspective, there's reason to hope this call is ignored, even if there are prurient or even moral reasons to want these chaps run out of business.
Prop trading is the fun end of town, where the mischief occurs and the best stories emerge.
Those who say there are no characters in the Square Mile any more only need meet a couple of these lads to stand corrected.
The difference between prop trading and gambling is a matter of semantics only. The bank is taking a punt on the back of a hunch. You could say it's like betting on horses, except horse race experts would insist they are way more scientific.
So why not just ban it?
For one, it hasn't actually been a cause of much misery to anyone other than the traders and the banks that employ them.
When a prop trader goes rogue and racks up billions of losses, it's a source of head-shaking and finger-pointing from folk who just hate the Square Mile in the first place, but it hasn't generally led to bailouts from public funds.
It wasn't traders that exploded HBOS or Bradford & Bingley or Alliance & Leicester, just bad loans and bad business of the most mundane kind.
Another reason not to ban the props is that it is nearly impossible to be sure what qualifies and what does not.
When is a trading desk hedging a position built up by a client and when is it taking a punt?
The difference between my money and your money might be perfectly clear, but at investment banks it is far murkier. The reason why a millionaire hedge fund schemer banks with Goldman Sachs is precisely so that he has access to that firm's balance sheet when he needs it. When the bank places a trade, we have to guess whether it is doing so on its own account or on behalf of a client.
Stymied by regulation and by a culture that has been strongly risk-off for several years, the prop trading desks at many banks have been shut or hacked down in any case.
New rules to keep them in check don't really seem necessary.
In any case, if a clever dealer does come up with a way to make a bank (and himself) lots of money there is zero chance that the bank will refuse this offer once convinced it will work.
Even if officially they don't prop trade, in reality they will just call the new wheeze something else, give the fellow a desk in the "client services" division and let him go merrily about his money-making business. Until he blows up, at which point they'll declare they had no idea – not a clue! – what the chap was up to.
The BSC is well meaning. But the banks will always be ahead of any rule-making it might help to force through.
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