September 5, 2012

Volcker Rocks IR

Volcker would be a great name for a shred-metal band. It seems vaguely gothic and you can picture musicians in leather with guitars and tattoos. Maybe colored hair.

Alas, no. The Volcker Rule is no band. But it’s prompting musical chairs that may rock IR. I’ll tell you how in a moment. First, this:

If you’re a member of MAPI, I’ll be regaling your IR council Friday Sept 14 with tales of the tape. If your IR program is stuck in the 1980s with a mullet and a Wurlitzer, come occupy a seat at the Intercontinental.

Second, a word on markets: No clanging claxons but we’re tapping the tam-tam on market risk. Hedging is up. Sentiment is vastly neutral – like painting the ceiling gray. Market structure to end August was a restive crowd in a mall at closing time.

Paul Volcker calmed the crowd. The six-foot-seven-inch Fed chairman loomed over markets from 1979-1987, earning praise for heeling rampant inflation. In 2010, a section of Dodd-Frank aimed at halting speculative trading by large commercial banks came to be called the Volcker Rule because the eminent economist had proposed it.

The rule hasn’t yet taken effect but Wall Street is already scurrying like a school when the bell rings. An exodus of proprietary traders – professionals deploying a bank’s own assets for return – from names like Goldman Sachs and Morgan Stanley is setting up shop.

But capital is hard to raise now. Regulations are stiffer, compliance costlier. These hedge funds won’t get the support Goldman Sachs offered with a balance sheet and access to Fed windows. And moves come in response to anticipated regulations, with no market imprimatur. It’s artificial.

Since Regulation National Market System in 2007, the bulge bracket – big “investment banks,” now all commercial banks thank to Fed orders following the demise of Lehman Brothers in 2008 – has leveraged superior access to capital to make orderly two-sided markets.

It’s been profitable. At certain points in past years some large banks had quarters without a single negative trading day (no days when positions were closed at losses). What if it ends?

IR tends to operate as though nothing changes. Ignore markets. Target investors.

Think for a moment. Goldman stops trading for proprietary profits. Ditto for firms behind 70% of your volume. The ETFs and indexes and models have got no one reliable on the other side of trades.

What happens to your stock price? The upshot may be less noise. Rational investment has crept back this summer to nearly 15% of volume from about 12% to start the year. But volumes are down. Institutions are skittish. Markets move on currencies.

We in IR want to be relevant, valuable. Can you achieve both without changing what you do? You tell me. I’d want to know the substance of my trading – measure it analytically. Quantify it. Set realistic views for management.

That would be cool like rock stars. Imagine. You’d have the time, the peace of mind, to start a band named Volcker.

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