Thursday, September 29, 2011

Trader Pay Would Face Restrictions Under Draft Volcker Rule - BusinessWeek

Trader Pay Would Face Restrictions Under Draft Volcker Rule - BusinessWeek
:

"U.S. banks would have to change the way they compensate traders involved in market-making activities under one of the proposed restrictions of the so-called Volcker rule, according to a draft circulating among regulators.

The rule, which aims to ban most proprietary trading by banks with federally insured deposits, would exempt trades related to market-making as long as the activity met at least seven standards, or principles. One principle would be that traders get paid from fees and the spread of the transactions rather than the appreciation or profit from their positions, according to a copy of the draft reviewed by Bloomberg News"

While no doubt this will be wildly unpopular, it seems it makes sense in a world where society (or at least Fed and Treasury) have concluded that some firms are too big to fail. With that decision, comes an inherent morale hazard problem. This MAY reduce it. (of course wouldn't the salary once makes be a function of profits? So while not directly tied to the actual trade, they are just one step removed and likely to still have traders take excessive risks. (Better not perfect ;) )

HT to MoneyScience on this!

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