“Useful-to-know Financial Terms #6: Proprietary Trading”

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“Proprietary trading (also “prop trading” or PPT) occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, with the firm’s own money as opposed to its customers’ money, so as to make a profit for itself. They 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. Many reporters and analysts believe that large banks purposely leave ambiguous the amount of non-proprietary trading they do versus the amount of proprietary trading they do, because it is felt that proprietary trading is riskier and results in more volatile profits.” – Wikepedia

As the Volcker Rule has been approved by the US regulators, banks and financial institutions will be banned from all actions of making risky bets including proprietary trading. Such action is expected to ensure safer financial system and reduce market volatility.

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