Proprietary Trading in Banks: Analysis, Critic, and Evaluation

金融学代写 Since the financial crisis in 2008, there have been numerous reforms in the banking sector.But the most outstanding…

Since the financial crisis in 2008, there have been numerous reforms in the banking sector. But the most outstanding improvements that have far-reaching effects are the US Volcker Rule and Vickers ring-fencing of bank deposits. The fundamental aim of the two reforms is to protect depositors’ assets with the banks from risky bank trading activities. The main argument was that if bank deposits and hazardous activities of the bank are kept separate, the insolvent of one will not affect the other.金融学代写

The benefits that accrue to the adoption of these reforms are that the two functions could be unwound without risking bank run. And other systemic crisis. However, the adoption of these reforms has its undoing in the banking sector. Therefore, this paper will offer an opinion on prohibiting banks from engaging in proprietary trading as proposed by Volcker and Vickers.

Proprietary Trading of Banks 金融学代写

The Volcker Approach 金融学代写

The Volcker Rule bans the proprietary trading where banks act principle for the trading accounts in the purchase or sales financial instruments. According to Bubb and Kahan (2017, p. 1022), banks should be regulated to keep their trading activities on the check. And avoid future financial melt-down. It was a tradition that banks trade and speculate in various investments for its accounts. In essence, the banks try to build on revenues and profits through short and speculative trades, which are sometimes risky. The banks do so by acting like investment fund or hedge fund.

The primary concern of these types of banking activities put insured deposits and probably the bank itself at risk. Many trading reasons led to the death of Wachovia and Washington Mutual. And other banking institutions due to capital backstop that needed government interventions after 2008-2009 financial crises. According to Ospina and Uhlig (2018), mortgage-backed securities resulted in losses and insolvency of banks in 2008. Therefore, proprietary trading would not be one of the main activities of such banks according to Volcker Rule. Volcker proposed divestiture and withdrawal of depository institutions. Or bank holding company of such institutions from availing and funding private equity or hedge fund products.

The Vickers Approach 金融学代写

Vickers philosophy aims to restructure the banking sector on how they conduct business in the UK. Krahnen, Noth, and Schüwer (2017, p. 67) observed that Vickers approach sets limits on how various established operations interact and try to each of the legal entity. He primarily proposed legal separation or ring-fencing retail bank operations in the UK from business operations such as global trading, investment, and brokerage services. The report established that banks should have separate legal and independent components within their structure that will offer retail and commercial banking services.

The aim is to create insulation between banking operations from risky proprietary trading activities and other financial threats in the financial system. Another target was to ensure continuity of retail banking operations at the event of failure by ring-fencing banks. Like Volcker, Vickers philosophy aims to remove connections with risky activities that are away from mainstream activities of the bank and that are likely to put insured deposits at risk.





这些类型的银行活动的主要关注点是使保险存款以及银行本身处于风险之中。许多交易原因导致Wachovia和Washington Mutual死亡。由于资本的支持,其他银行机构也需要政府在2008-2009年金融危机后进行干预。根据Ospina和Uhlig(2018)的研究,抵押支持证券在2008年导致银行亏损和破产。因此,根据《沃尔克规则》,自营交易将不是此类银行的主要活动之一。沃尔克提议剥离和撤离存托机构。或此类机构的银行控股公司利用私人股本或对冲基金产品并为其提供资金。


维克斯(Vickers)的理念旨在根据英国银行业的运作方式来重组银行业。 Krahnen,Noth和Schüwer(2017年,第67页)观察到,维克斯方法对各种既定业务如何相互作用并尝试与每个法人实体设置了限制。他主要提议将英国的零售银行业务与全球贸易,投资和经纪服务等业务业务进行法律分离或隔离。该报告确定,银行在其结构中应具有独立的法律和独立组成部分,以提供零售和商业银行服务。


The Benefits of Proprietary Trading in Banks 金融学代写

Proprietary trading occurs when a bank trades “stocks, derivatives, bonds, commodities, or other financial instruments” in its accounts (Krahnen, Noth, & Schüwer, 2017, p. 68). Bank use proprietary trading as one of the most crucial targets to maximize profits. Because banks have ample amount of capital, sophisticated advanced technologies, and superior market information at their dispensation, they find proprietary trading a batter option to increase on the revenue streams.

The banks enjoy 100 percent of the profits made from prop trading, which is unlike brokerage, where it earns a commission. When banks are engaging in proprietary trading, they can stock an inventory of securities for future use. The securities bought out of speculations can be used for reselling to the clients. The bank can also loan these securities to the client who wishes to sell short. 金融学代写

Moreover, prop trading is used by banks as market markers in security trading. For instance, a bank dealing with particular securities can provide liquidity for investors in those securities. In this case, the bank buys the security using its account for reselling to investors in the future. Notably, the bank will only leap benefits of the securities if their inventory increase in value or resell at higher prices than buying price. Also, banks can exploit the advantage of access to full information that investors do not have. Therefore, they use this information to gain full benefits in security investment.

Additionally, banks have added advantage banks have in the access to tools and technologies for trading over other investors. There are available sophisticated proprietary technologies for automating the trading. And hence offer the best platform to access a wide range of markets and process for high frequency trading. The technologies available allow simulation and testing of ideas as well as running for demos too on screens. The proprietary trading platforms are in-house and hence have full control. And benefit of owning the software, unlike other retail traders in the security market.

Risk of Proprietary Trading in Banks 金融学代写

Hedge funds have been grumbling not to their rivals in other funds, but groups of banks using their account to trade in securities. Banks had dedicated tables in security exchange centers like Wall Street for trading their cash before Volcker rule in the US. Banks’ proprietary trading focused on the same opportunities eyed by hedge funds. And use more leverage or borrowed money to amplify their risks. The use of borrowed money was risky to banks.

Banks are reducing or eliminating the number of dedicated trading agents for their cash in Wall Street. Prop trading teams from JP Morgan, Deutsche Bank, Credit Suisse, UBS. And Morgan Stanley were reduced or eliminated when 2008-2009 financial crises occurred. Although there is cash flowing in this proprietary trading arena in the past years, it has been a significant reduction from levels of previous years before the crisis. The crisis was caused by underwriting mistakes such as holding risky credits. That resulted in huge losses that led to financial market melt-down.

Moreover, bank traders take various risks even when acting on behalf of their clients at Wall Street.

The culture of risk uptake has made it difficult to crack down risky trading at banks. For instance, investments that do not frequently trade like corporate bonds see traders taking their bank capital to buy from a client. The same is aggravated when the trader feels that the market is increasing and become tempted to buy more bonds from a client. On the other hand, if the market is uncertain, the trader may wary and buy a small slice.

Although the trader is serving the client, it is a significant risk to the bank in cases when purchasing large bonds from the client. The market becomes risky because it involves buying and selling. The market is, therefore, banks buy and sell securities based on the perceived client demand, and hence, the market future is blurred. Banks also buy for speculation using their accounts on their capital. The critical point is risk exposure in case the market crumbles. 金融学代写

Furthermore, proprietary trading can cause the financial system to collapse. 金融学代写

For instance, if a big bank makes a wrong investment decision like buying bonds that turn out to be worthless, there will be more at stake than just bank operation but also client savings. Big banks are interconnected with other banks. And hence a failure in the big bank can lead to failure of the whole system and may cause the economy to stagnate or fall. When such a crisis occurs. The government is left without option but to bail out the big bank using billions of taxpayers’ money.








银行正在减少或消除在华尔街兑现现金的专门交易代理商的数量。摩根大通,德意志银行,瑞士信贷,瑞银的道具交易团队。当2008-2009年金融危机发生时,摩根士丹利(Morgan Stanley)被减免。尽管过去几年在这个专有交易领域中有现金流,但是与危机爆发前几年相比,现金流已经大大减少了。这场危机是由诸如持有风险信用等承保错误引起的。这导致了巨大的损失,导致金融市场崩溃。






The Volcker and Vickers rules came to remedy the above risks. They argue that the threat posed by these banks to the economy is significant enough to allow banks to operate at their discretion and without control. The banks can act as brokers between the buyers and sellers, but making bets on inventory should not be allowed.

Impact Banning Proprietary Trading on Banks 金融学代写

Though meant for the good of the whole banking sector and economy, the two reforms suggested by Volcker and Vickers were not well received by all banks. Volcker Rule is already implemented in the US banking industry, but the UK banks were given until 2019 to ring-fenced their operations and make each process a separate legal entity (Britton, Dawkes, Debbage, & Idris, 2016). As a result, there are impacts on the ban on banks to do proprietary trading.


Impact of Volcker Rule in US Banks 金融学代写

Volcker Rule banned depositors’ banks, making investment speculations on securities that include risky trading. The rule came as a remedy to the financial crisis prevalent in the banking industry. And that could cause loss of taxpayers’ money in case of the bailout when market conditions deteriorate. The rule was implemented in Wall Street where statesmen like “hedge fund manager George Soros, Citigroup’s former chairman John Reed, Vanguard founder John Bogle. And former SEC chairman William Donaldson” welcomed it as the start to overhaul cleaning of the system by restricting banks from trading with their accounts (Zamansky, 2013).

US banks are reducing their activities in proprietary trading to 3 percent of Tier 1 capital invested as required by the regulation. As of Sept 30th, 2013, Goldman Sachs had reduced its investment in these funds from $15.4 billion to $14.9 billion. Banks will either end or separate their proprietary trading in future as they adapt to the new operating structure. 金融学代写

Most importantly, banks will be required to change their culture and governance in adapting to new regulations.

Beside the Volcker Rule meant to limit banks in their business operation operations, banks will need to adjust to this culture from previous risky trading culture in Wall Street. In compliance with this rule, bank chief executive officers will be required to annually attest in writing that the bank has a mechanism to comply. As a new culture, directors and manager have the responsibility to set and communicate the active. And appropriate culture of complying with the rule. These are hard undertakings by the banks’ supervisors to ensure that operations do not fall short of the recommendations of the Volcker rule.

Bankers groups argued that the Volcker Rule is likely to lead banks to other high-risk ventures that perpetuate the possibility of banks’ exposure to financial loss or pose a threat to the financial stability of the US. As a result, the implementation process needs to be meticulous to avoid hampering with the market operations unnecessarily. And hence create potential loopholes and pitfalls to the rule. However, financial sector lobbyists are working on trying to defeat Volcker Rule by claiming that it may have a severe impact. On the supply of liquidity generated by proprietary traders that also function as a market maker. The rule will, therefore, lead the restructuring of the trading business.

On the other hand, Vickers ring-fencing approach is considered a stricter approach by banks in the UK. 金融学代写

Although the implementation of the reform is targeted to take shape by the end of 2019, it implies the banks in the UK (Britton, Dawkes, Debbage, & Idris, 2016). Banks need to start making plans for an end-state solution today. As the process of implementing the reform continues, banks are realigning their strategies to fit the new management and operations structure.

The financial system could face increased systemic risk as banks try to enter more unregulated and risky product trading. Bank managers see the reform as treating the symptoms rather than the cause of the financial crisis. They expressed fear that banks may resort to shadow banking sector where there are few regulations. The reason being ring-fencing is an expensive undertaking by banks and hence increases incentives for banks to avoid traditional banking routes. Vickers acknowledged that the cost of ring-fencing for all banks would average 7 billion pounds (Britton, Dawkes, Debbage, & Idris, 2016). The high price of restructuring will push banks to find alternative strategies of investment.

The Volcker and Vickers rules are mitigations to the detriments that banks are likely to drown the economy. The reforms followed after the 2008 financial crisis that led to an enormous bailout of banks to salvage the economy. US banks have significantly adopted the rule which has been welcomed by the hedge fund investors. Vickers ring-fencing, on the other hand, continues for implantation in the UK with banks seeing the move as demotivation and incentive to resort to more risky and unregulated avenues. Nevertheless, both reforms were a necessary adaptation to the future banking sector and optimal and safe operations of the economies. 金融学代写


Bubb, R., and Kahan, M., 2017. Regulating Motivation: A New Perspective on the Volcker Rule. Tex. L. Rev., 96, p.1019.

Britton, K., Dawkes, L., Debbage, S., and Idris, T., 2016. Ring-fencing: what is it, and how will it affect banks and their customers?. Bank of England Quarterly Bulletin, p.Q4.

Krahnen, J.P., Noth, F., and Schüwer, U., 2017. Structural reforms in banking: The role of trading. Journal of Financial Regulation, 3(1), pp.66-88.

Ospina, J., and Uhlig, H., 2018. Mortgage-backed securities and the financial crisis of 2008: a post mortem (No. w24509). National Bureau of Economic Research.

Pettersson, E., 2013. Volcker Rule Block Request Dropped by Bankers Group, Bloomberg retrieved on 9 August 2019 from

Zamansky, J., 2013. Wall Street Will Prepare Ways to Gut the Volcker Rule, Forbes. Retrieved on 9 August 9, 2019, from