Lehman just announced their profits doubled. So did Goldman. And anyone who is watching the IB business knows that an increasing share of these profits come from the proprietary trading desks of these organizations. Of course, these banks are also taking on higher risks, putting more of their balance sheets in play.
But does anyone else find these results fishy?! The banks are "beating the Street" quarter after quarter. Of course there is the occasional miss, where a trading desk gets called out and loses $200M, but I have not heard of one recently.
The answer lies in the fact that the Ibanks have placed themselves at the nexus of information and human capital. I have no doubt, that within a fairly limited spectrum, they do recruit a higher percentage of the "best and brightest" than most industries. But they also have their "ears to the ground" like no other organization -- they understand they can make high quality trades with great information, and they have modeled their businesses to attract this information.
They see everyone's trades. They get leads from their hedge fund clients, private equity clients. I would guess a good deal of information drifts across the Chinese Wall from their M&A group. (Even though they would be loath to admit it.) They have high level contacts in governments where they do privatizations and other floats. They have research analysts scouring the "channel" and piecing together investment theses. They have proprietary data models that help them see opportunities. They are truly at an "information delta" and use their proprietary trading desks to farm the soil.
Couple of questions about this position. Is it legal, or should it be? Do they have such a large advantage that they are becoming the WalMarts of information / trading?
Secondly, if competitive pressures within the industry are so strong, are they being forced to put increasingly larger portions of their balance sheets at risk, and therefore increasingly vulnerable to a melt-down that could drastically effect the global economy? It would be interested to know how correlated Wall Street's proprietary trading desks are. My bet is that they are more correlated than most would care to admit.
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