What kind of trading Obama is looking to reduce

 @ibtimes
on January 21 2010 5:20 PM

NEW YORK - President Barack Obama is looking to reduce proprietary trading at the biggest financial firms to help stabilize the financial system.

Here is an overview of what Obama is looking to do, and how Wall Street may get around it:

* Proprietary trading, known as prop trading, entails a bank trading with its own money, instead of just linking up buyers with sellers.

* Proprietary trading can take two forms: a trader can make bets on markets using a bank's money. Or a trader can be mainly buying and selling positions with customers, and risk some of the firm's money as part of that activity. Obama is looking to limit the first kind of prop trading, but not necessarily the second.

* That's where Wall Street could find a loophole. A trader expecting strong demand for a particular company's bonds might buy a large swathe of the securities. If the trader sells them in short order, the firm can realize a healthy profit. But if demand is lower than expected, the firm may hold onto some bonds much longer than originally planned. That could still be profitable for the firm, but it might not be, and may in fact result in the large losses that Obama is looking to prevent.

* Firms may claim to be entering positions in anticipation of client demand, when in fact they are really looking to bet on the securities. That sort of activity could be hard for the government to police.

(Reporting by Dan Wilchins; Editing Bernard Orr)

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