The Emperor's New Clothes

I picked up today's FT on my way to work today. On page 11, an article titled "Bank traders rush to launch spin-offs before rule change" reported that many traders - fearing tougher prop trading regulations - are leaving banks to start hedge funds. The article's accompanying illustration showed over 250 new hedge funds in Q1. "In spite of one of the worst second-quarter for the industry on record", these funds are attracting investments. So I asked myself, "What has regulation wrought?" Over the past few weeks, supporters and detractors of the proposed Dodd-Frank bill have argued about the reform's effectiveness. In particular, detractors have singled out the exceptions that effectively delay compliance until 2012 or later. So will reforms really level the playing field for all investors or is it simply an illusory change? Reforms have unintended consequences. Perhaps the reinvigoration of the hedge fund industry is an example of such. So has anything changed on Wall Street? I don't know. What I suspect is banks will continue to have prop trading in the near future, and that there will be more hedge funds. These firms all need new servers, grid software, analytics, etc. to deal with high frequency trading, market data, and new regulations like Basel III. That's good news for technology firms like Intel, Sybase, and Platform Computing.

Oh, by the way, Happy Bastille Day.


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