source wikipedia
Proprietary trading is a term used in investment banking to describe when a bank trades securities with its own money as opposed to its customers' money, so as to make a profit for itself. Although investment banks are usually defined as businesses which assist other businesses in raising money in the capital markets, most investment banks make the majority of their profit from trading on their own behalf.
source investopedia
When a firm trades for direct gain instead of commissions. Essentially, the firm decides to profit from the market rather than from commissions and fees.
Firms engaging in proprietary trading believe they have a competitive advantage that enables them to earn excess returns.
source - SMH - 20 May 2006
The ASX-ASE estimates 30 to 40 per cent of total stockmarket turnover on any given day is proprietary trading.
Merrill Lynch's proprietary desk is one of the most prominent in the local market, along with Credit Suisse.
Above estimate is considered an understatement made for public consumption. More accurate - about 60%
high finance in hightown - a true story
In the 1990's a stressed-out proprietary-desk trader (now long-gone) would periodically let slip a few gems. He worked for an Australian based broker that has since been swallowed up in the consolidation of later years. Call them HighTown.
As told ..
The principals of HighTown met every morning at 7:00am to review the overnight action in the overseas markets. The house had something like $50m of its own working capital to push around and get a return on. One of the top 10 ASX stocks, (big enough to push the market around), registered in Australia, and traded in London and New York. Being an Australian registered company, the London and New York markets for that stock were often thin. Frequently when the offices of HighTown opened at 7:00am there would be a number of overseas orders for large quantities of that one stock sitting in the the fax machine in-tray. Naturally the proprietary-desk derivatives trader wasn't supposed to know that - ie - chinese walls. Knowing large orders in that one stock would move the market, the nature of the 7:00am meeting was to assess where best to trade the house-funds that day. Naturally if the large overseas orders were buy orders, the house activity for the morning was inclined to the buy side to give the market an extra shove up. If orders were sell orders, the house bias was to the downside, the boulder given an extra nudge down, with the house ambulance waiting at the bottom of the cliff.
An indication of the extent of proprietary trading can be seen on the last page of brokers recommendations and newsletters which have mandatory disclosure statements listing the stocks the house holds on its own behalf at the time of the recommendation. Disclosures relate only to stocks contained in the newsletter and do not represent the full extent of house holdings. Of course if recommendations are not issued, the broker is not obliged to declare their interests.
honkers and the house of the rising sun
Just prior to the asian markets opening the fax machine again ran hot. Usually around 11:00am through 11:45am. Long-Gone PropTrader would express amazement at the size of the orders and dismay at the apparent suicide nature of them. That's where lunch-time surges came from.
program trading - a variation on tape reading a simple clue
Program Trading can mean a number of things. Total turnover on the ASX-ASE is around $4b each day. It is estimated $3b of that is proprietary trading. It's not done all at once. It's managed in small parcels as discussed elsewhere in this site. Given the value and volume, it's unlikely screen operators sit in front of a screen all day picking away at small orders - mistakes can happen. It's mechanised. If you know what to look for it can be seen. It's regular. Progressive. Happens every day. On any of the top 200 stocks, regular, uneconomic transaction sizes are evidence of iceberg orders and proprietary trading. Brokers don't pay brokerage.
source: Leon Gettler - age.com.au -March 24, 2007
ASIC has challenged the effectiveness of the so-called "Chinese wall" intended to separate Citigroup's proprietary trading desk, which trades in shares using the bank's own money, and Citigroup's corporate advisory services, which regularly deal with material information that could send a company's price up or down. ASIC's case challenges the way banks conduct proprietary trading, which is a big money spinner. In 2006 five of the biggest investment banks, Morgan Stanley, Goldman Sachs, Merrill Lynch, Lehman Brothers and Bear Stearns, generated $US61 billion ($A78.2 billion) from proprietary trading, about half their total revenue, and a 54 per cent increase over 2005.
Proprietary Brokers = Prime Brokers = Name Brokers
An article dated 20 June 2007 published by the SMH, states Westpac is looking to grow its online trading presence to compete against CommSec, which dominates the online share trading market with a 48 per cent share and Etrade, has 26 per cent. A total market share of 74% between the two retail majors. Allowing a 6% share to Westpac gives a total of 80%. That leaves a 20% remainder spread among the "name brokers".
A notable difference is Westpac, Commsec and Etrade are not proprietary trading houses as are the "name" brokers.
It will be noted from the list of SFE Futures Brokers
• Commsec, Etrade, and Westpac are not futures brokers.
• The futures brokers are also (mainly) listed as "Prime Brokers".
imperator @ http://www.imperator.com.au/informationoutline~nocache~1~SubTopicDetailsID~1354.htm
There is no better illustration of proprietary trading than FX. MBL, an early leader in foreign exchange trading, would offer buy/sell prices to clients in US dollars and other major currencies. Miners being among the biggest users of this market. MBL’s ForeX desk did not link clients buying US dollars with clients selling (as a broker would) but rather took the other side of the client’s position, trading it in the market with other banks and proprietary operators with the purpose of making a profit. Today, of the billions of dollars traded daily in foreign exchange markets, only about 10% involves a "real" client such as an exporter. The other 90% is speculative (proprietary) trading by the banks.
