Prop Trading at Investment Banks
Does anyone know why prop trading is polarizing at investment banks? I heard something like a majority of GS' profit comes from their prop trading division, and MS for example does no prop trading. Is this true and why wouldn't MS partake / do other BBs prop trade?
Same question
I heard virtually no banks do prop trading anymore due to regulatory issues. But not sure. Most banks do flow trading.
Since 2008 prop technically isn’t allowed due to volcker. However, some desks can still take on their own views depending on their budget. Also, what you can do is take “inventory” which can basically just be your prop trade and that’s how a lot of banks make their PnL it’s not just spreads.
Equities is, from what I have heard from friends, a little harder to do this with since it’s more regulated than FICC and in FICC it’s harder to define what exactly is a hedge/inventory. So that’s why you see a lot of people from SS FICC seats go to buy-side directly rather than equity SS going straight to buyside
Volker does not apply to treasuries or spot fx. Even beyond those two categories traders typically take directional risk by either over or under hedging through derivatives
Yes, absolutely. To add on, if you are on an options/vol desk you’ll have your own views on each Greek you have within each given basket of underlying and tenors
Prop trading was a thing of the past
Not called prop trading, but ‘active risk management’ nowadays. Because of volker people are scared to use the word prop in banks.
traders can take a directional view when hedging their client flow (over/under hedge based on their view, doesn’t get flagged as ‘prop’ trading).
Is there a breakdown of how a trader's comp is based on the market making platform, taking orders, and then actual risk taking. What percent of total comp is risk taking ability?
Heard from pretty senior people that GS basically ignores Volker, but like others said, it's just in the form of choosing what and what not to hedge based on client flow. Also heard MS tries to stick to more agency trading (i.e., just making money of volume/spread, and hedging most of their positions).
What people above are missing, is the fact that banks that don't take U.S. deposits do not need to follow the Volker rule. So firms like Jefferies, Nomura, etcetera can trade how they want; but the prop teams generally are not major contributors to PnL and are pretty lean.
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