Smaller securities firms that trade their own capital are recruiting the risk-takers that major Wall Street firms are letting go, according to an August 11 article in the Wall Street Journal by Aaron Lucchetti. These firms received no government bailout money and are not subject to tougher regulation and compensation oversight reserved for the major firms that pose a “systemic risk.” We are “a recipient of the purge,” according to one such firm.
The article focuses on Steven Shonfeld and his trading firm, Schonfeld Group Holdings LLC. Shonfeld raked in $200 million last year, according to the article. He provides seed money for new hires, lets them decide how to trade, and compensates them with a percentage of the profits. Schonfeld says his best traders make $5 million to $10 million annually.
The firm, founded in 1988, is getting out of the brokerage business, where it had some regulatory blemishes, and betting more of its own capital ? just as the majors are (supposedly) reducing their risk taking. For example, Schonfeld is backing a firm called Quantitative Models Capital Management, run by a Ph.D. in physics and former Bear Stearns employee. It is a rapid-fire, quantitative game. At a dinner with traders, Schonfeld said that anyone who looked at the menu more than 90 seconds was in the wrong business.
Although trading firms like Shonfeld’s currently fly below the regulatory radar that may change. Some industry experts say that these firms are no less prone to problems than the majors and should not be ignored. Others argue that speculators provide liquidity and are a necessary component of functioning markets. They claim that should these firms go belly-up, it would not sink the larger economy.