Wall Street Has Reined in Prop Trading, But Greed Lives On

Posted: February 15, 2010 in Uncategorized

Within minutes of the White Houses announcing the so-called “Volcker Rule,” Wall Street was working to shoot down the framework for reform. The banks’ main bone of contention is the stipulation that limits proprietary trading.

In truth, most of the big banks on Wall Street learned their lesson after the credit crunch of 2008. With the exception of Goldman Sachs, “proprietary trading in a lot of banks has diminished pretty dramatically,” says WSJ reporter Scott Patterson, author of The Quants. Thankfully, Patterson confirms some of the banks still in the game “are using models that factor in the possibility of big swings” or black swan events. 

That’s a good thing. For the most part, proprietary trading desks are built on quantitative traders. Using highly sophisticated trading models, “quants” have dominated trading desks around the globe for the better part of two decades.

In their infinite wisdom and mathematical certainty, quants have also managed to nearly wipe out the global markets on several occasions. You can thank the quants for the implosion of the hedge fund Long Term Capital Management in 1998, the creation of the CDO market and the models that didn’t factor in the possibility of falling home prices into AIG’s Credit Default Swap risk model.

Trillions of dollars in bailouts later, here we are.

It all begs the question: if quants are unquestionably some of the smartest folks around, why don’t they do a better job calculating risk?

“They know these things can happen, these are very smart people,” Paterson explains. “But when times are good it’s too tempting to ignore the possibility that something horrible can go wrong.”

In other words, even geniuses are greedy, pretty much ensuring a “good


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