Sense on Cents

Did Wall Street forget to send out invitations to the party going on in the equity markets, or are people merely preoccupied with other affairs to truly care as to what is happening in lower Manhattan?

In any event, I referenced the other day during my appearance on CNBC’s Street Signs that the greatest risk for the financial industry is if people choose not to play the game. In fact, I very much believe that dynamic is playing out. Why? Look at today’s price action in the equity markets.

The equity market opened up approximately .5%, proceeded to trade up another .2% to .3% in the first 30-45 minutes, and then has literally sat in a ten to fifteen point range almost all day. Why isn’t there any volatility? There is very little trading and volume is very low.

What does that mean for Wall Street? Fewer opportunities to capture the bid-ask spread in trades. How do those within the Wall Street banks react to this? Look for them to put more of their own capital on the line. That proprietary activity flies right in the face of the Volcker Rule, but businesses need to generate revenue. If trading volume is not there, then prop trading is the only other choice.

Look for Wall Street analysts to promote the price action as reason for people to enter the market. Prior to doing that, a necessary precursor to making any investment is a full and thorough review of all assets and liabilities. Know exactly where you stand on both sides of your balance sheet so any investment decision is consistent with your overall financial picture and outlook.

LD

This entry was posted on Friday, March 5th, 2010 at 2:48 PM and is filed under General, markets. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.