CFA: Investors shouldn’t blindly trust Wall Street

Investors face substantial risk by blindly trusting Wall Street traders [in the absence of clear trading guidelines], says Kurt Schacht, managing director of the Standards and Financial Market Integrity division of CFA Institute.

Current market-making guidelines are ambiguous, so Schacht calls for implementation of “exceedingly clear and properly restrictive definitions of banned prop trading”—especially after the recent and highly publicized JP Morgan loss triggered by errors and sloppiness at the company.

A recent blog post by CFA’s head of capital markets policy, Jim Allen, says a bank was “bound to be caught red-handed trading derivatives. […] That it was JPMorgan Chase is a true surprise.”

Read: Don’t overreact to JPMorgan’s loss at FT.com for Steven Rattner’s view on the company’s actions.

“Regulators and banks must eliminate any and all prop trading, particularly that disguised as market making,” says Schacht. “Welcome to the tangle of trying to define and properly limit proprietary trading.”

He believes the duty to lead the investment business out of this crisis falls first on everyone in the profession, and would like to see the proper implementation of the Volcker Rule. He says that will go a long way toward ensuring “the best interests of investors — and improved systemic protection for markets — are not drowned out by commercial self-interest in the process.”

Read “V” Is for Volcker: All Investors Have a Stake in Prop Trading Rule’s Outcome, his most recent blog post on the topic, for his view on how the Volcker rule should be implemented.

Alongside Schacht and the CFA, many industry professionals haver voiced their concerns over the proposed rule, which is expected to “affect every Canadian investment fund manager that is affiliated with an American bank, and the Canadian mutual funds they manage.”