By Allen Sykora of Kitco News
(Kitco News) -- The closing of bank proprietary-trading desks could at least temporarily mean less liquidity in the metals markets, but otherwise is not likely to have a lasting impact on the metals landscape, veteran futures-market observers say.

Furthermore, this hinges on factors still unknown, such as whether the desks will be completely shut down or instead spun off into separate entities or funds.

Still, the developments may reduce some of the anxiety of those who have alleged that banks tended to suppress prices, particularly in silver, one analyst says.

News reports emerged last week saying that J.P. Morgan Chase & Co. and Goldman Sachs will close proprietary-trading operations, on which traders take positions in a range of markets with the banks’ own money. The moves were said to be in response to efforts to comply with the Dodd-Frank financial reform law signed in July. In particular, the so-called “Volcker rule” limits the extent to which banks can bet with their own capital. It is named for former Federal Reserve Chairman Paul Volcker, who pushed for limits on risk-taking by lenders.

News reports about the closings last week cited sources said to be familiar with the situations, but with the banks themselves declining formal comment on their intentions.

“It could at least temporarily lessen the liquidity,” said Bill O’Neill, one of the principals with LOGIC Advisers. “However, I don’t think this is going to change the price direction where the market is going to go. If we’re going to $1,400 (in gold)…we’re still going to $1,400.”

Jeffrey Christian, managing director of CPM Group, said the final impact on the metals landscape may hinge on exactly how any closures occur—if desks are simply shut down or spun off.

“If they just close desks down, those guys as a group will not go elsewhere to trade with the same strategies,” he said. “Some will get jobs elsewhere, but won’t replicate what they were doing necessarily.”

This would probably mean less liquidity that would mean a wider spread in over-the-counter quotes for commodities.

“You may well see more volatility,” Christian said. An age-old market axiom is that thinner trading conditions mean potential for exaggerated price moves since smaller orders can have a greater impact.

“But volatility is an issue that could be debated either way,” Christian added, commenting that some might argue that the proprietary desks themselves might have added to the volatility.

Meanwhile, Christian said, should the trading desks be spun off and thus largely remain intact, the ultimate impact on the metals landscape could be limited.

“The unit would continue to use the same trading strategies they have been using,” he said. “There might be some reduction in volume because the new owners take a slightly different risk profile or (have) different capitalization. But it would probably be a much less significant change.”

Sterling Smith, commodity trading advisor and analyst with Country Hedging, suggested that Goldman in particular might well end up spinning off its proprietary-trading desk, based on past history. “I don’t that is necessarily going to affect metals trading at all,” he said.

It’s a tougher call what J.P. Morgan might end up doing, Smith said. An actual close might mean a “little drop in liquidity briefly, but I think it will find its way back quickly,” Smith said.

Even if volume declines, it will eventually return someplace else, whether it occurs through foreign banks or non-bank players, several observers said.

“It’s more a restructuring than it is an elimination of players,” O’Neill said. “It’s a change in the way trading is done and who’s doing the trading. But you can still be sure the big gold traders will still be around.”

George Gero, vice president with RBC Capital Markets Global Futures, suspects that any traders who lose their jobs will end up at hedge funds or other entities. “I don’t see that that is going to curb trading at all,” he said.

Still, one potential impact is that closure of the desks could reduce the anxiety of those who have alleged that banks have suppressed silver prices, said David Morgan, precious-metals analyst with Silver-Investor.com. Silver is a smaller market than gold and the net short position of commercial accounts tends to be larger relative to the overall size of the two markets, he said.

“I wouldn’t say it alleviates all of the concern, but should alleviate a great deal of the concern about big banks’ participation in the silver market,” he said.

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