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Opportunities Created By The Volcker Rule

While the rule that limits prop trading will depress earnings at some firms, it could create new opportunities for other market participants.

The controversial Volcker Rule that limits investment banks' proprietary trading undoubtedly will depress earnings at some firms that rely on prop trading as a source of revenue. But even though the rule isn't in place yet, it already is creating opportunities for other market participants.

"The Volcker Rule, which states banks can't have large proprietary trading shops, will certainly create an opportunity for start-up firms," asserts Marty Leamy, president of the Americas for Orc Software, a provider of technology and services for the global financial industry. "The new shops will want to start up quickly. Even though the Volcker Rule is far off, traders and the firms are already moving ahead of it."

For example, Morgan Stanley, Goldman Sachs and Bank of America have scaled back proprietary trading and private equity businesses in anticipation of the Volcker Rule's rollout. In addition, in January JPMorgan analysts downgraded Goldman Sachs to a neutral rating, arguing that more than half of Goldman's investment banking revenues -- more than any other U.S. bank -- will be affected by the Volcker Rule.

On the other hand, technology providers such as Orc, Simcorp and Omgeo, to name a few, stand to benefit as new firms are launched. Even some established brokers could benefit, depending on their business models.

Lightspeed Trading, a provider of direct market access trading technology, risk management solutions, and brokerage services for professional retail active traders and institutional investors, already is preparing for life under the Volcker Rule.

"We anticipate many traders leaving the big banks, changing positions or starting new funds and therefore looking to utilize both a manual trading platform or automated trading solution," says Scott Ignall, chief technology officer at Lightspeed. "This is an opportunity for Lightspeed to service this new trading group by providing them with a full suite of professional products and services needed to start their own businesses or enhance their current funds' trading capabilities."

Ignall expects Lightspeed will gain new clients as a result of the Volcker Rule and says he is working with his IT team to prepare accordingly. "We have been adding a massive amount of trading system capacity and rolled out additional products and services geared to the institutional trader," he reports. "Additionally, we have added the capacity to clear trades at several other firms in the past year, to satisfy a broader range of client needs." Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio

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