Stocks & Commodities V. 32:2 (31): Q&A by Don Bright

Stocks & Commodities V. 32:2 (31): Q&A by Don Bright
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Q&A by Don Bright

The Volcker Rule

I keep hearing so much about the Dodd- Frank bill coming into effect soon. Is this something that will impact your traders? How about retail traders? Any light you can shed on this would be appreciated.


Wow, this is probably one of the toughest questions I have ever been asked. Of course we have to wait and see how much different the trading environment looks when all this gets sorted out and implemented. Here are some thoughts, however.

One primary portion, the “Volcker Rule” (named after Paul Volcker, chairman of the Federal Reserve under Presidents Jimmy Carter and Ronald Reagan, as well as Chairman of the Economic Recovery Advisory Board under President Barack Obama), attempts to limit how major investment banks and brokers (like Goldman Sachs, JP Morgan, Bank of America, and so on) can trade and invest their depositors’ money. Essentially, as I read it, these big banks will not be allowed to commingle their proprietary trading money with their depositors’ money. This may be a good thing for our traders, since who wants to compete with these big brokers anyway? The other side of this coin is that this may cut down on the daily trading activity to such an extreme degree that liquidity will dry up significantly.

Here is an excerpt from http://www. volcker-rule/overview/:

The final Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricted investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and risk management. The Rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions have a seven year timeframe to become compliant with the final regulations.

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