Proprietary trading
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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
[edit]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
[edit]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
[edit]- Akuna Capital
- Citadel Securities
- DRW Trading Group
- Flow Traders
- Global Trading Systems
- Headlands Technologies
- Hudson River Trading
- IMC Financial Markets
- Jane Street Capital
- Jump Trading
- Optiver
- Quantlab
- Radix Trading
- Susquehanna International Group
- Tibra
- Tower Research
- Tradebot
- TransMarket Group
- Virtu Financial
- XTX Markets
See also
[edit]References
[edit]- ^ Heather Stewart (21 January 2010). "What is 'proprietary trading'?". The Guardian.
- ^ 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.
- ^ a b Johnston, Tim (2007-03-23). "Citigroup challenges Australian commission's conflict of interest ruling". New York Times. Retrieved 2014-10-11.
- ^ 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.
- ^ "Proprietary Trading: What It Is & Related Trading Firms". DayTradeTheWorld. 28 September 2020.
- ^ dzawu, moses (22 January 2020). "After Losing $2.3 Billion at UBS He Now Seeks Redemption in Ghanaian Bonds". Bloomberg.com.
- ^ dalton, samantha (20 November 2012). "Kweku Adoboli: From 'rising star' to rogue trader". BBC News.
- ^ Binham, Caroline (2018-12-20). "BNP failed to book traders in Germany for a week". Financial Times.
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