Wikipedia

Proprietary trading

Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using depositors' money) to make a profit for itself.[1] Proprietary trading can create potential conflicts of interest such as insider trading and front running.[2][3][4]

Proprietary traders may use a variety of strategies such as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, or global macro trading, much like a hedge fund.[5]

Conflicts of interest

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There are a number of ways in which proprietary trading can create conflicts of interest between a bank's interests and those of its customers.[2]

One example of an alleged conflict of interest can be found in charges brought by the Australian Securities & Investments Commission against Citigroup in 2007.[3]

Another source of conflicts of interest is potential front running, in which case the buy-side clients suffer from significantly higher trading costs. Front running per se is illegal, but there are circumstances under which a broker that operates a proprietary trading desk gains advantage over its clients based on inferences from order book data.[4]

Famous traders

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Trader Nick Leeson took down Barings Bank with unauthorized proprietary positions. UBS trader Kweku Adoboli lost $2.3 billion of the bank's money and was convicted for his actions.[6][7]

Armin S, a German private trader, sued BNP Paribas for 152m EUR because they sold to him structured products for 108 EUR each which were worth 54 00 EUR.[8]

Notable proprietary trading firms

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See also

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References

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  1. ^ Heather Stewart (21 January 2010). "What is 'proprietary trading'?". The Guardian.
  2. ^ a b Pitt, Harvey L. (2005-02-22). "Conflict of Interest Lessons From Financial Services". Compliance Week. Archived from the original on 2014-10-17. Retrieved 2014-10-11.
  3. ^ a b Johnston, Tim (2007-03-23). "Citigroup challenges Australian commission's conflict of interest ruling". New York Times. Retrieved 2014-10-11.
  4. ^ a b "A Front-Running Smile?". Traders Magazine. 26 May 2005. Retrieved 18 January 2022. A broker who operates a proprietary trading desk can significantly increase the buyside's implicit trading costs. In the past couple of years, some investment banks' quarterly gains from principal trading alone have approached $1 billion. In certain cases, the assets of individual bank's hedge funds have exceeded the combined assets of all of the bank's customers.
  5. ^ "Proprietary Trading: What It Is & Related Trading Firms". DayTradeTheWorld. 28 September 2020.
  6. ^ dzawu, moses (22 January 2020). "After Losing $2.3 Billion at UBS He Now Seeks Redemption in Ghanaian Bonds". Bloomberg.com.
  7. ^ dalton, samantha (20 November 2012). "Kweku Adoboli: From 'rising star' to rogue trader". BBC News.
  8. ^ Binham, Caroline (2018-12-20). "BNP failed to book traders in Germany for a week". Financial Times.
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