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July 1, 2012

Follow Your Dreams

By Michael Scotti

Starting a business is the American dream. Some prop traders are doing just that as a result of the Volcker rule, which bans proprietary trading at banks. These traders, forced from the friendly confines of the mother ship, are leaving banks and launching firms. This month's cover story by James Armstrong outlines the pitfalls and obstacles facing new firms. What are they finding? Without the deep pockets and other benefits of a large company behind them, traders need to deal with numerous peripheral issues. These include raising capital and figuring out which systems to use. Skills in running a business, the story points out, are just as important as trading know-how.

Michael Scotti

We've also got a rundown of a long-awaited SEC rule-limit up/limit down. The new rule is designed to eliminate erroneous trades and reduce trading halts. This came about after the "flash crash" of May 6, 2010. That's when limit orders disappeared and the market suffered a huge correction-for 20 minutes, before bouncing back. Limit up/limit down puts collars around a quote, creating a trading range. This new rule is a refinement of the single-stock circuit breakers already in place, which was the SEC's first step to protect investors after the May 2010 event. The two rules together, many believe, should prevent another "flash" incident. You can read about the mechanics of this rule in Peter Chapman's story, as well as some of the complaints in our Rules and Regs section.

Foreign exchange trading is now the newest staple of Traders Magazine. Each month we'll cover FX. It will have its own section-just like options has had for the last two years. This issue features an Aite Group survey of the buyside. The survey was conducted by a former buyside trader turned consultant, Howard Tai. He spent 16 years at American Century. That came after a career in FX and derivatives trading at banks. Mr. Tai was excited to dig into the results of his survey and discuss current buyside practices.

Tai emphasized that money managers should control their FX transactions, and not hand them to a custodian. Firms that don't take control leave "money on the table," he said. And in a low-return environment, those lost dollars add up and ding a manager's performance. He also said that any firm with overseas assets should look at its FX trading. We hope that also applies to our FX coverage at Traders Magazine.

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