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The King of Wall Street Takes on the Casinos

Posted by Larry Doyle on July 22, 2009 7:08 AM |

Kings like control. Control drives revenue and profits.

Revenues and profits are a function of volumes and margins.

Any businessman worth his salt works tirelessly at increasing his own volume and margin while necessarily narrowing those of his competition.

Larry Fink

I see a classic case of these competitive forces at work this morning in a report from the Financial Times, BlackRock Chief Attacks Wall Street Earnings:

Larry Fink, BlackRock’s founder and chief executive, on Tuesday took aim at the “luxurious” trading profits enjoyed by Wall Street banks, saying that they have taken advantage of reduced competition to charge their customers more for even basic trades.

“There are fewer players. There is very little capital being committed by these dealers,” Mr Fink said

Little doubt The King of Wall Street, Larry Fink is irked by the ransom being charged by those running the Wall street ‘casinos.’  The king says as much in stating:

“They’re just taking the spread between the bid and the ask [the price gap between buyers and sellers] and they are making very luxurious returns,” he added.

In layman’s terms, the King is denigrating those working the Wall Street ‘casinos’ as the equivalent of toll takers on the Triborough Bridge. Who likes paying increased tolls? Nobody, and especially not a king.

What is a king to do to reinstitute some order in his kingdom?  The FT provides further insight:

Mr Fink, who made his comments as BlackRock reported better-than-expected second-quarter results, added that he was looking at ways to reduce that spread to save his clients money.

While the king will clearly use his bully pulpit within his kingdom to narrow the margins of the casinos, the simple fact is, the narrowing of those spreads should transcend Wall Street so the common folk in the hinterlands can also benefit. That transparency can only occur with the timely reporting of transactions, via the operational system known as TRACE (Trade Reporting and Compliance Engine).

The Trade Reporting and Compliance Engine is the FINRA developed vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities. All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under an SEC approved set of rules.

Current TRACE reporting time: 15 minutes

A few key terms regarding TRACE are:

1. over the counter, meaning off an exchange and thus often less transparent in less liquid sectors of the market.

2. eligible fixed income securities (bonds), meaning only a few select sectors of the market (primarily corporate bonds) are required to provide timely reporting of transactions.

Sense on Cents called for the timely reporting of every transaction in every sector of the market, especially derivatives, last week in writing, “Can We ‘TRACE’ JP Morgan’s Business?”:

What should regulators compel them to do? JP Morgan and every other financial firm on Wall Street should have to report every derivatives transaction to a system known as TRACE, which stands for Trade Reporting and Compliance Engine.  This system currently only covers transactions within the cash markets and not derivatives.  What does that mean for investors? No transparency and price discovery for investors in the customized derivatives space. As such, Jamie and friends can keep those bid-ask spreads nice and wide and ring up huge profits in the process.

Would the King go for this? Perhaps not. Why? Kings like to make rules and maintain order within their kingdoms. If too much information gets out to the hinterlands, margins within his immediate domain – that is the financial management industry – may also narrow.

As with any king and any kingdom, it’s all about control .

LD

  • Mike

    LD,

    I bet if GS and JP were to be ‘TRACED’ we would see some very clear evidence of their use of high-frequency programs. What would that do to their profits? Let alone reputations if it got out into the public.

    It seems as though the more transparency we try to implement, the more resistance there is from ALL of Wall St.






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