 | This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Find sources: "Proprietary trading" – news · newspapers · books · scholar · JSTOR (December 2020) (Learn how and when to remove this message) |
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.
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.
Conflicts of interest
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.
One example of an alleged conflict of interest can be found in charges brought by the Australian Securities & Investments Commission against Citigroup in 2007.
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.
Famous traders
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.
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.
Notable proprietary trading firms
- 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
References
- Heather Stewart (21 January 2010). "What is 'proprietary trading'?". The Guardian.
- "Proprietary Trading: What It Is & Related Trading Firms". DayTradeTheWorld. 28 September 2020.
- 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.
- Johnston, Tim (2007-03-23). "Citigroup challenges Australian commission's conflict of interest ruling". New York Times. Retrieved 2014-10-11.
- "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.
- 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.
| Hedge funds | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Investment strategy |
|  | ||||||||
| Trading | ||||||||||
| Related terms |
| |||||||||
| Investors | ||||||||||
| Governance | ||||||||||
