Banks are facing increased competition from hedge funds. They are losing more and more of their key dealers who have opted to lead hedge funds. At the end of May, Bloomberg News reported major personnel exits that captured the attention of the industry. Michael Pringle, previously Citigroup’s global head for dealing shares in London, left to join Moore Capital Management hedge fund. Another example of an emigrant is Joel Solomon, who departed Citigroup to found his own long-short hedge fund company. He remarked in an interview to Bloomberg that the banks had previously kept up well in competing with hedge funds, but things have changed dramatically since the onset of new financial regulations. And at Morgan Stanley, an entire team, led by Jason Mackay, is prospecting to trade opportunities outside of the bank.
Previously, for the most part, bankers migrated to hedge funds if they wanted the freedom to take riskier bets. New regulatory dispositions adopted since the financial crisis have, however, accelerated the migration trend of dealers. The background is that many banks that once gave its dealers greater sums of money in-hand now do not offer proprietary trading or will not offer it in the future. In the future, banks will be increasingly focused on executing general trade orders on behalf of customers. Even the practice of bonus payments to dealers has changed since the financial crisis in many major banks: now they often pay bonuses only in the form of delayed share allocations. Joel Solomon, previously of Citigroup, confirmed the trend towards delayed payments in his interview with Bloomberg.
Deutsche Bank, Germany’s top financial and banking institution, is also not immune to such changes either. Recently, Robert Mandeno, a rare breed of banking entrepreneur, recently left Deutsche Bank. Mandeno was responsible for Deutsche’s electronic trading systems and also held a leading position in its foreign exchange trading. Following in kind, Kevin Rodgers, the head of global currency businesses, has also turned his back on the Deutsche Bank. Internally the departure of these two major banking figures raises questions as to what extent they might be implicated in alleged manipulation of foreign exchange rates. Meanwhile, Deutsche Bank has lost its status as the largest global foreign exchange dealer. Now, more than a dozen authorities worldwide have detected major traders who have manipulated important reference values for the foreign exchange market. These investigations put not only the banks, but also their clients, under the microscope. In this context, allegations have also now been raised against hedge funds that could have benefited from these manipulations as well.
In the United States, this trend is much more visible than in Europe. The so-called “Volcker rule,” which shall be obligatory to all banks starting in 2015, completely prohibits proprietary trading. The deciding factor for this came from massive stock price drops in May 2010, due to a chain reaction in computer trading. The U.S. Securities and Exchange Commission goes on the offensive against high-frequency trading. The aim of the package of measures is an improved transparency and fairness in financial trading, as the authority’s chairwoman, Mary Jo White, recently announced.
In preparation for these new regulations, many banks have already closed or split off their respective divisions. For example, Morgan Stanley has recently outsourced its division “Process Driven Trading” to a hedge fund. Citigroup, who Joel Solomon had worked for, closed its division for Equity Principal Strategies in 2012. This list could almost be continued endlessly: the U.S. banking giant JPMorgan gave in their proprietary trading for commodities. Those who will take advantage of these new regulations are primarily investors and state-owned enterprises as the markets become more stable and more resistant.
Traditional banks and financial institutions are being forced to a new level of transparency, and it is causing significant shifts in personnel as well as business practices. It is news like this that causes bank customers to continue to lose faith in the once ironclad custodians of the world’s money. Needless to say, these new tightened regulatory requirements will keep these institutions exceptionally busy, and distracted from serving the needs of their biggest asset of all—their customers. It is not only the loss of key personnel that bankers need to be worried about. The writing is on the wall.