The latest draft of the rule, which seek to limit the amount of risk firms can take with their own capital, could bring about changes to the fixed income trading model if implemented and ultimately lead to banks cutting back the amount of capital allocated to trading businesses in order to generate a reasonable return on equity.
For Goldman Sachs, which has historically brought in sales and trading revenues well above peers, the days of its outsized success might be over, according to Hintz.
According to Hintz, the "guilty until proven innocent" theme in the Volcker draft rules attempts to "minimize aberrations in trading performance among firms." "We believe the spirit of Volcker attempts to limit outsized risk taking by individual firms, but may effectively narrow the gap between the Street's best traders and peers," the analyst writes.In the period between 2002 and 2006, Goldman continually outperformed on sales and trading revenues, even though it reported losses on 20% of the days over that period compared to an average of 5% among its peers. The trading success was largely attributable to "a more sophisticated and granular capital and risk allocation system that, combined with its risk management processes, is inherent to the firm's partnership culture." A culture, Hintz, says that has traditionally been impossible to duplicate. Still, with the implementation of the Volcker rules, Goldman will have to go through a major overhaul. "We expect Goldman to implement changes within its global fixed income and institutional equities businesses to automate market making activities; reduce staffing on trading floors and shrink overhead to enhance business margins," Hintz wrote. "The balance sheet usage of trading will be tightly constrained and flow will be pursued in an attempt to provide liquidity while using less capital. Turnover rates of inventory, revenue sources, risk metrics will be tightly monitored to stay within the Volcker limitations."
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV