Volcker Rule & Baptists-Bootleggers
April 6, 2012 1 Comment
This is a remarkable piece to be showing up on Bloomberg:
JPMorgan Trader’s Positions Said to Distort Credit Indexes
A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside the firm said.
What is remarkable is not only that the specific trade that JP Morgan CIO is known for putting on (including in, as they call it, “Series 9 (IBOXUG09) of the Markit CDX North America Investment Grade Index”) is specifically mentioned, but that the trader is mentioned by name. This piece on WSJ Online has even gotten ahold of a rival sell-side index trader’s Bloomberg market commentary about him. It is quite surprising, and a little disturbing, to see all these things showing up in the press.
You see, the press is treating this as a Volcker Rule-relevant story, and in a sense it is (as someone quoted by Dealbreaker puts it: “Welcome to the tangle of trying to define and properly limit proprietary trading”). These are indeed the sorts of trades that make the whole notion of ‘banning prop trading’ not so simple.
But the real story is that somebody’s been leaking all this stuff to reporters and the question is why. What is there to gain? Well, to ask this question is to answer it: the Bloomberg sources sound mostly like hedge fund guys, and they seem to have fed Bloomberg reporters the inside-baseball complaint that the index that JP’s CIO trades is “broken”. That tells me these may be people who put on a popular
basis skew trade (sell CDS protection on individual companies, buy protection on the index that contains them) within the past month or two, and thus implicitly have the other side of JP’s trade. And now they’re trying to use the press to squeeze that other side and force his hand, perhaps put Volcker-scare pressure on JP to force their trader to cut his positions – so that they can monetize their trade in the money! Yay!
It occurs to me I’ve been missing one angle in my Volcker criticism. Because here what we have is something like a baptists-bootleggers dynamic: hedge funds (the bootleggers in our story) trying to use a form of purist abolitionism (‘no prop trading’) to squeeze a rival.
But hey! That’s all okay I guess! Hedge funds feeding info to the press to try to make levered short-term trades move in their favor – not worth thinking about. Nothing to see there. All that matters is whether JP’s trade is a ‘prop trade’ or not. Because whether it’s an ok trade hinges crucially on whether it fits the (fuzzy and arbitrary) definition of ‘prop trade’!
UPDATE (4/7): “Walter Kurtz” suggests they’re just hedging their own DVA. That makes sense, but doesn’t let anyone get morally outraged about anything, so let’s all ignore that. PROP TRADE!!
Meanwhile Lisa Pollock at FT gets at the real question here:
Stories like this remind us of the perils, and potential merits, of financial journalism. If you have a moment then, put yourself in the shoes of a journalist covering markets…
… now picture that someone, or maybe several someones, call you and claim that so-and-so is distorting the market. Now, this is something your readers would be no doubt interested to know. But of course, you need to do more research. Figure out who’s telling the truth. Is this just one angry person with a vendetta (and a trading position to match) or is this the tip of an iceberg?
I may have another post on this later. A funnier one.