The Proposed Volker Rule Prompts Spin Outs of Prop Desks

With the Obama Administration moving forward on the so-called Volcker Rule to limit banks from conducting proprietary trading, suppliers of trading technology are already noticing an increase in bank spin offs to form new hedge funds.In response to this trend already underway, they are packaging up technology that could cater to these soon-to-be independent proprietary- trading groups.

Earlier this week, Statistical Research Laboratory and Progress Software announced they plan to offer a one-stop shop solution for quantitative and algorithmic trading targeting brokers and hedge funds. Progress will bundle its Progress Apama complex event processing platform into the solution.

Both companies point out their planned offering comes after President Obama's recently proposed bank reforms. "If investment banks have to spin out their proprietary trading desks and hedge funds, these new funds will be looking for the technology platform that allows them to continue trading rapidly and cost effectively," commented Dr. Giles Nelson, chief technology at SRL.

On Thursday, Feb. 25th, BusinessWeek reported that the Obama Administration plans to send Congress legislative language for the proposed Volcker Rule, a measure that will put limits on proprietary-trading desks housed inside commercial banks. The idea is to curtail risky trading activities in banks that accept consumer deposits, preventing another bailout at the taxpayer's expense. The ban will also prevent banks from "owning, investing in or sponsoring hedge funds and private equity groups." No timeline was reported but the language for the measure will be submitted to the U.S. Senate Banking Committee working on financial reform, according to BusinessWeek.

As these proprietary trading or hedge fund units go independent, they also will need more technology to run complex high frequency algorithmic trading strategies and monitor P&L, risk and back-office functions such as corporate actions and reconciliation, which the joint offering provides.

Of course, the technology companies are keen to lower the barriers to entry and save time to market - phrases that warm the hearts of hedge fund managers that can't afford to waste months or years and millions or dollars building infrastructure from scratch. Granted, there are other solutions that can address this problem, but combination of the Progress Apama CEP technology to create and trade complex high-frequency trading strategies, combined with the risk monitoring and back-office components all in one place, is noteworthy.

Even if the Volker Rule is slow to happen or never happens at all since the financial industry is fighting it, the proposed rule is having an impact. In advance of such a ban, both tech companies claim they are seeing more proprietary trading groups leave the banks and new hedge funds emerge as new funds become available from investors.With the Obama Administration moving forward on the so-called Volcker Rule to limit banks from conducting proprietary trading, some technology vendors see an opportunity to serve bank spin outs. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio