The ban on prop trading at US deposit-taking institutions, referred to as the 'Volcker rule', was a key plank of the Dodd-Frank financial reform bill signed into law on 21 July 2010. Legislators' insistence that banks should not take risks with deposits means their trading activity will be largely confined to customer-driven business and market making. With banks' traders being blocked from doing what they do best in the US, the fast-developing markets of Asia offer fertile ground for their future careers. The trickle of migration that flowed in the aftermath of Lehman Brothers' collapse could soon be swelled by Volcker refugees.
Proprietary trading is the top of the tree for sell-side traders. With client order flow typically a training ground, trading on the bank's own account is the height of responsibility and remuneration. For a proprietary trader to move back into client work would reverse that progression. "This would be moving downstairs," said one former banker.
Although the Dodd-Frank Bill will take a long time to bring into effect -- US law firm Davis Polk estimates the Volcker rule alone could take up to seven years -- banking giants J.P. Morgan and Goldman Sachs are already said to be shutting their own proprietary trading operations. Moreover, the big US banks are likely to shut their international proprietary trading operations rather than just their US operations.
With the increased drive to unify regulation across US and Europe following the financial crisis, there is every chance European banks will experience a similar regulatory squeeze in due course.
"People have two-to three-year time horizon before they need to make significant changes in what they do -- but clearly the banks are anticipating that," says Andy Willner, founding partner of Hong Kong-based executive search firm New Millennium Group.
As a result, traders are looking to Asia as an environment that could further their career, says Simon Grainger, senior consultant at search specialist NJF Search International. "For successful prop traders who do have portable strategies, the opportunities in Asia are very attractive and we have seen a marked increase in relocation and repatriating due to the Volcker rule," he says.
Overcapacity in the US and European markets for quantitative and particularly high-frequency strategies is also driving firms east. However he warns, "A profitable high-frequency strategy in the US and Europe does not always plug and play into Asian markets, due to the relative immaturity of infrastructure and low comparative trading volumes in the region."
Not everyone will be suitable to move across, Grainger says, depending on acquired knowledge and skills. "If a trader is following a particular strategy on European and US markets, how portable is that strategy or skill set to the Asian market?" he says. "There are obvious difficulties for traders who have a specific focus, i.e. long/short US large caps. Unless they are prepared to work pretty unsociable hours from an office in Asia, they essentially will be starting from scratch and learning about a new universe of stocks with their own inherent characteristics."
The opportunities for former sell-side prop traders in Asia do not stop at the established top-tier sell-side firms. A number of mid-tier and smaller brokers have hired aggressively in the last 12-18 months, several using Hong Kong as their Asian trading hub. Traders who left investment banks in late 2008 for 'eat what you kill' execution-focused brokers have found themselves in demand of late, but may soon find themselves in a more competitive environment.
Moreover, alternative asset managers that had previously tried and failed to establish an Asian presence due to a lack of experienced traders in the region will see this as an opportunity to reestablish themselves. Several sources predict an increase in buy-side trading desks in Asia both from long-only firms and hedge funds. "I expect we will see numerous announcements, with hedge funds being set up and talent being absorbed by buy-side firms," says one. "Although banks are finding homes for many of their traders, the prop trading desks of 60-70 people would take a huge amount of commitment in asset raising ability. Hedge fund start-ups by comparison are maximum around 20 people."
New firms that are keen to follow investment flows from east to west will find recruitment in the region an easier task than ever before. One broker added, "New graduates in the US used to consider working abroad when the upside in home markets was limited. Now they are willing to venture out from day one."
And if banks' proprietary trading operations are outlawed in Asia as well as Europe and the US, buy-side firms -- particularly hedge funds and prop shops -- could well provide the only resting place for traders.
"Although the Asian hedge fund market is relatively small, growth in the economic prowess within the region will be mirrored by number of hedge funds and capital flows -- the International Monetary Fund sees the Asian economy growing by 50% in five years exceeding that of the G7 in 2030," notes Grainger.