JPMorgan Prop Shop Getting Chopped

NEW YORK (TheStreet) - JPMorgan Chase's (JPM) trading desk has become the latest victim of prop-shop chopping to comply with financial reform rules.

But JPMorgan's trading businesses won't be dramatically affected by the change, according to someone familiar with the situation, since it's only getting rid of a handful of people who take capital from the bank's balance sheet and use it expressly for profiting. The bulk of its trading operation, which delivered about $22 billion in revenue last year, will remain in tact.

On Tuesday, word quickly spread through the market that JPMorgan would shut down its prop-trading operations, following a Bloomberg report in the late afternoon. JPMorgan's storied investment banking division will begin by winding down commodities trading, the smallest of its three prop-trading operations. It will later shut down the fixed-income and equities trading divisions, which are larger and deliver more revenue.

A spokeswoman declined to comment.

JPMorgan has kept its prop trading relatively small. The bulk of its trading operation comes from what is known as "flow" -- providing liquidity for client trades.

The news that the prop-trading operations would be shut down wasn't surprising, since big banks must divest their proprietary trading divisions and much of their hedge-fund and private-equity assets to comply with financial reform. The so-called Volcker rule has led Bank of America (BAC), Goldman Sachs (GS) and Citigroup (C) to begin the process of divesting or winding down affected businesses. Banks affected by the change, including Morgan Stanley (MS), are also reportedly trying to move proprietary traders into asset-management roles instead.

Perhaps more importantly, big banks are also searching for new ways to make up for lost revenue. Goldman, for instance, has moved into derivatives clearing and market-making. But it's unclear how far banks can go in using balance-sheet funds for businesses that can technically be defined as proprietary trading - whether market-making or purchasing hard assets to hold in inventory for clients. There stands to be some uncertainty until regulators outline a precise definition of what counts as "proprietary trading."

However, the JPMorgan source says there's little doubt that Volcker only applies to a narrow view of prop trading: "When Volcker said, 'I know it when I see it,' that's what he meant," said the source, who wasn't authorized to speak publicly about the situation.