proprietary trading

The Greed Merchants: How the Investment Banks Exploited the System
by Philip Augar
Published 20 Apr 2005

A survey of a group of banks operating in London in 2003 found that several made no distinction in their management accounts between client and proprietary trading.18 It was either an unimportant distinction or, more likely, it was just too difficult to separate out. One side effect of the closure of the specialist arbitrage desks in the late nineties was to give shareholders the impression that proprietary trading had gone away. Investors like to hear this, for they regard it as a high risk and unreliable business. They would not give the investment banks a high share price if they thought that too much profit came from proprietary trading. The investment banks disclose that they do proprietary trading and admit that it is managed alongside client business, but they tuck such news away in quiet corners of the financial statements.

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In the absence of profit numbers, qualitative comments are made about proprietary trading and, like Lehman’s in 2002, annual reports tend to play down the activity: ‘Instead of using a high percentage of the firm’s capital for proprietary trading, we held strong to our well-defined risk appetite and remained committed to our customer flow business model.’22 Other firms liked to under-emphasize this business: ‘To a lesser degree, Merrill Lynch also maintains proprietary trading inventory in seeking to profit from existing or projected market opportunities.’23 Because most proprietary trading actually occurs as an integral part of customer trading, Goldman Sachs, believed to be the most aggressive proprietary traders amongst the large investment banks, is able to state truthfully that equities arbitrage ‘is the only purely proprietary business we are in’.24 However, a former member of the management committee at one of these firms told me: ‘The investment banks have made a fortune from proprietary trading, especially in fixed income and mortgage-backed securities.

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While sales and trading activities are generated by client order flow, the Company also takes proprietary positions based on expectations of future market movements’.19 However, you have to look pretty hard to find this and other references to proprietary trading in Morgan Stanley’s Form 10-K, a technical document that is heavy reading even for financial specialists. There was no explicit mention of proprietary trading in the glossy, more commonly used version of the annual report.20 Morgan Stanley is not untypical. Every other large investment bank carries out proprietary trading, and every one gives a full disclosure, but rarely, if ever, in a prominent place in the financial reports. Numbers are few and far between.

Quantitative Trading: How to Build Your Own Algorithmic Trading Business
by Ernie Chan
Published 17 Nov 2008

I have covered the pros and cons of retail trading versus proprietary trading and the issues to consider in choosing a brokerage or proprietary trading firm. In a nutshell, retail brokerages give you complete freedom and better capital protection but smaller leverage, while proprietary trading firms give you less freedom and less capital protection but much high leverage. Finding a suitable retail brokerage is relatively easy. It took me less than a month to research and settle on one and I have not found a reason to switch yet. Finding a suitable proprietary trading firm is much more involved, since there are contracts to sign and an exam (Series 7) to pass.

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You do not need to negotiate with a banker or a venture capitalist to borrow more capital for your business. The brokerages stand ready and willing to do that. If you are a member of a proprietary trading firm (more on this later in Chapter 4 on setting up a business), you may even be able to obtain a leverage far exceeding that allowed by Securities and Exchange Commission (SEC) Regulation T. It is not unheard of for a proprietary trading firm to let you trade a portfolio worth $2 million intraday even if you have only $50,000 equity in your account (a ×40 leverage). At the same time, quantitative trading is definitely not a get-rich-quick scheme.

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For example, if you have low capital but opened an account at a proprietary trading firm, then you will be free of many of the considerations above (though not expenditure on infrastructure). I started my life as an independent quantitative trader with $100,000 at a retail brokerage account (I chose Interactive Brokers), and I traded only directional, intraday stock strategies at first. But when I developed a strategy that sometimes requires much more leverage in order to be profitable, I signed up as a member of a proprietary trading firm as well. (Yes, you can have both, or more, accounts simultaneously.

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences
by Steven G. Mandis
Published 9 Sep 2013

The firm also played multiple roles, including proprietary investing and investing with clients, before he became CEO. His rise in the firm reflected the pressures and changes. Proprietary Trading Becomes a Larger Percentage of Revenues When one looks at the business principles that John Whitehead wrote in 1979, it is a particular challenge to reconcile the goals of proprietary trading with putting clients’ interests first, or the goal of being the leading adviser. Proprietary trading has one client: Goldman. As proprietary traders, we were walled off from client activity. We were not there to provide liquidity to clients, manage funds for clients, or advise clients.

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From time to time, we were also approached by banking or trading to help finance a transaction or buy something from a client or coinvest with a client—actions that, most of the time, raised all types of potential conflicts and died because we were too busy to have long conference calls to discuss it. But generally we were in our own silo. Proprietary trading at Goldman did not start in the 1990s. Bob Rubin joined the risk arbitrage proprietary trading area in the equities division in 1966, and by the 1980s it was considered one of the most profitable and powerful areas in the firm. When Rubin and Steve Friedman took over as senior partners in the 1990s, Goldman accelerated its additional role of risking its own capital versus being a mere “market maker.” It was the size of the losses from proprietary trading in 1994 that caused many observers to think the firm would not survive.

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It was the size of the losses from proprietary trading in 1994 that caused many observers to think the firm would not survive. How big and important are proprietary trading and principal investing activities at Goldman? Glenn Schorr, a Nomura Securities equity research analyst covering Goldman stock, estimated that the Volcker Rule, which is intended to restrict proprietary trading and principal investing at investment banks, would impact 48 percent of Goldman’s total consolidated revenue. To put this into context, he estimated the impact at 27 percent, 9 percent, and 8 percent of total consolidated revenues of Morgan Stanley, Bank of America, and J.P. Morgan, respectively. Certain Goldman client-oriented sales and trading desks had “proprietary trading” operations.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation
by Richard Bookstaber
Published 5 Apr 2007

I would learn more over time about his remarkable appetite for detail and his penchant for condensing things onto one sheet of paper, as we would construct a risk report with an almost unreadably tiny type size to compress all the relevant risks of the firm onto one 8 1/2 by 11 inch page. 77 ccc_demon_077-096_ch05.qxd 2/13/07 A DEMON 1:45 PM OF Page 78 OUR OWN DESIGN Despite his assurances to the contrary, Sandy Weill was not enamored with the high-stakes proprietary trading embodied by this group. That antipathy did not stop him from buying Salomon, the biggest trading house in the world—a firm that, even after many attempts to broaden its revenue base, still made all of its earnings through proprietary trading. To try to control the unit, he first pushed to have both the head of U.S. fixed income arb, Rob Stavis, and his European counterpart, Costas Kaplanis, report to his son, Mark Weill.

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This was not the first time the sights of the firm had been drawn to the proprietary trading unit. Warren Buffett had occasional thoughts of getting rid of the arb unit, depicting the proprietary/client setup at Salomon as “a casino with a restaurant out front.” But he could never seriously 87 ccc_demon_077-096_ch05.qxd 2/13/07 A DEMON 1:45 PM OF Page 88 OUR OWN DESIGN consider doing so because the arb unit made half the firm’s revenue and pretty much all of its earnings. Travelers, however, could take such thoughts more seriously, because proprietary trading represented only about 10 percent of its revenues.

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Indeed, it often looked good—and almost free of risk—precisely because LTCM was in it. Both Goldman Sachs and Salomon had large positions that mirrored those of LTCM. For Salomon, this was understandable, because all of the LTCM principals came from Salomon’s proprietary trading group. Losses mounted for hedge funds, brokers, and banks across the world. While other proprietary trading desks found themselves with market losses, the implications for LTCM’s major creditors were disastrous. Some of the most stalwart institutions shook to their foundations. They lost not only from market positions but also from the possible default on loans to LTCM.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

That is, people have believed for years that Goldman, as well as other banks, use their client trading desks as information sources for their own proprietary trading activities and thus have an unfair advantage. From this perspective, the rule might make some sense. However, there are potential problems with the separation of proprietary trading. First, short-term proprietary trading has become a particular target, which was not a central problem with investment banks. Many sovereign nations are also worried that restricting investment banks might also cause excessive volatility, less liquidity, and higher costs for governments issuing debt. Maybe the rule should restrict its scope to just not allowing proprietary trading from traditional banks that take customer deposits.

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One of the most controversial new rules on banking is the rule commonly known as the Volcker rule. There are two separate rules known as the Volcker rule. The first rule prohibits the banking entity from engaging in proprietary trading. The second rule places a limit on a bank’s involvement in hedge funds and private equity. Proprietary trading provides a large amount of profits for investment banks. Proprietary trading means that the bank is buying and selling securities with its own capital to make profits for itself.6 This rule applies to all “banking entities,” which includes banks, thrifts, BHCs, Savings and Loan Holding Companies (SLHCs), and their affiliates.

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Some Thoughts The purpose of the Volker rule is to prevent banks that are protected by the public sector safety net from having risks due to investments in hedge funds and/or proprietary trading desks which can increase their risk substantially. For example, take MF Global, which was a successful broker-dealer. The firm went bankrupt because of proprietary trades on Greece. Banks, like Citibank, that were ultimately protected by the umbrella of the government, took proprietary bets and when the bets went well, they kept the profits, and when they went poorly, they were bailed out. It might also be that assessing the risk of companies that engage in proprietary trading is harder for outsiders. For the most part, these proprietary activities played a small role in the financial crisis.

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
by Alan S. Blinder
Published 24 Jan 2013

But it was predictable that, as the fear factor dissipated, banks were going to dislike higher capital and liquidity requirements intensely. PROPRIETARY TRADING AND THE VOLCKER RULE There is a strong, though not necessarily accurate, belief that proprietary trading by commercial banks was among the root causes of the financial crisis. Was it? That’s a matter of definition. If we use the conventional definition of proprietary trading—actively buying and selling assets for the banks’ own accounts—there is relatively little evidence that proprietary trading got big commercial banks into the soup, and small banks never did much of it, anyway. If, on the other hand, we classify as proprietary trading the fateful decisions to retain significant volumes of their own MBS and CDOs on their balance sheets (“eating their own cooking”), there is little doubt that proprietary trading led them down the primrose path.

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If, on the other hand, we classify as proprietary trading the fateful decisions to retain significant volumes of their own MBS and CDOs on their balance sheets (“eating their own cooking”), there is little doubt that proprietary trading led them down the primrose path. Critics like the estimable former Fed chairman Paul Volcker argued in 2009 and after that banks that benefit from the protective umbrella of FDIC insurance have no business using depositors’ money to fund gambling operations that may foist bills onto taxpayers. Hence, the Volcker Rule: Commercial banks, which are insured by the FDIC, should stay out of proprietary trading. Conversely, financial institutions such as investment banks and hedge funds, which do lots of proprietary trading, should not be eligible for government bailouts.

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We are only about halfway through the table 11.1 list, but this is where we move from issues that were moderately controversial—leaving bipartisan agreement at least conceivable, to issues that were supercontroversial—making bipartisan agreement hard to imagine. Starting with: Proprietary Trading by Banks Risk taking had obviously been excessive in the run-up to the financial crisis. Some observers, including the formidable Paul Volcker and the prestigious Group of 30, a private group of international financial experts which he headed, claimed that proprietary trading was among the key causes of the meltdown. Others disputed this claim vehemently. As noted, much of the debate turned on how to define proprietary trading. Sadly, this case often fails the Potter Stewart test: You don’t know it when you see it.

Madoff Talks: Uncovering the Untold Story Behind the Most Notorious Ponzi Scheme in History
by Jim Campbell
Published 26 Apr 2021

Madoff maintained to me he was a fanatic in his belief in “Chinese walls,” information barriers between separate units within a brokerage firm to prevent inside information from, say, investment bankers working on transactions, from leaking in advance to the firm’s traders who could then illegally make money on the inside information. When BLMIS made a move into proprietary trading, Bernie said he walled it off from the market-making business to the extent that the proprietary trading desk was not allowed to trade through the market-making side of the house, though they sat adjacent to each other on the nineteenth floor. He also claimed the seventeenth-floor IA business was walled off from the market-making side as well, meaning the Ponzi side didn’t trade through the market-making platform.

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At the time, it was still largely unknown that Madoff was even in the hedge fund business, much less that he was running one of the biggest operations in the world behind locked doors on the seventeenth floor of the distinctive, oval-shaped “Lipstick Building” in midtown Manhattan, home to Bernard L. Madoff Investment Securities (BLMIS). The secrecy and security on the seventeenth floor was so extensive that even Madoff’s sons, Mark and Andrew, who ran the big market-making and proprietary trading operation up on the nineteenth floor—where Madoff made his name as a market maker executing trades for the likes of Charles Schwab & Company—lacked electronic keycard access. Frank Casey’s Boston-based hedge fund, Rampart Investment Management, was, without his knowledge, a competitor of Madoff’s invisible investment advisory (IA) business.

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Dubinsky uncovered the staggering and still relatively unknown amount of money Madoff stole from his investment advisory (IA) clients to launder into his leading market-making business to keep it afloat. Madoff always denied obsessively to me that he ever took a dime from the IA side of his business to prop up his beloved and onetime legitimate market-making and proprietary trading business (MM&PT). Hot on the money trail, FBI Special Agent Paul Roberts was part of the small FBI team assigned to the Madoff criminal enterprise. His weapon of choice: a spreadsheet. He had only recently joined the Bureau. He ended up moving into Madoff’s seventeenth-floor offices for three years, and on the case for six years.

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson and James Kwak
Published 29 Mar 2010

In any case, under ordinary market conditions, arbitrage opportunities are close to free money—at least until the number of competitors mimicking a particular strategy drives its profitability down to zero—a far cry from the traditional business of lending money and taking the risk that it might not be paid back. Although Salomon pioneered quantitative arbitrage trading, the practice soon spread to other investment banks, causing a huge flow of talent into Wall Street (significantly driving up the mathematical aptitude shown on the Philippon-Reshef skill curve) and leading to vast growth in banks’ proprietary trading activities (trading on their own account, rather than executing trades for clients).* Its popularity also fueled the rapid growth of hedge funds (lightly regulated investment funds open only to institutions and rich individuals), which grew collectively from less than $30 billion in assets under management in 1990 to over $1.2 trillion in 2005,69 with estimates over $2 trillion by 2008.70 Arbitrage became a staple trading strategy of many hedge funds.

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Because hedge funds are largely unregulated, large risk exposures were building up outside the view of the financial regulators. And because arbitrage spreads are typically very thin—pricing inefficiencies tend to vanish as traders take advantage of them—making significant profits required large amounts of borrowed money. This leverage was the reason why some proprietary trading operations lost large amounts of money during the 1997–1998 emerging markets crises when prices failed to converge as expected—leading even Salomon Brothers to largely disband its arbitrage team.71 The fourth money machine of modern finance—after high-yield debt, securitization, and arbitrage trading—was the modern derivatives market.

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These large banks also had the scale required to build full-service derivatives operations that could assemble complex transactions and hedge their component parts. These new businesses helped blur the traditional line between commercial and investment banks, replacing it with a divide between small banks, which continued taking deposits and making loans, and big banks, which could branch out into securitization, proprietary trading, and derivatives. BIGGER BANKING At the same time, large banks were also growing by invading each other’s territories and acquiring smaller rivals. Banks had been trying to get around the restrictions on interstate banking and the constraints of the Glass-Steagall Act for decades. Congress responded repeatedly with legislation limiting bank activities, including the Bank Holding Company Act of 1956, the Savings and Loan Holding Company Act of 1967, and the Bank Holding Company Act Amendments of 1970.

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market
by Steven Drobny
Published 31 Mar 2006

I actually ended up making about 35 percent of my loss back being short fixed income. After 1994, they dramatically changed the proprietary trading structure of the firm. A lot of people left, and a lot of people were let go.The prop group went from 20-plus pure prop traders down to 3 by mid 1995.They asked me to run the European proprietary trading group and rebuild it but with a very different risk mandate. That was the birth of what I call the “new proprietary trading group.” What lessons did you learn from the sterling/yen loss? Confidence is a very, very dangerous thing. Simply because you’ve had a good run doesn’t mean it will continue.

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CHAPTER 5 The Prop Trader Christian Siva-Jothy Former Head of Proprietary Trading, Goldman Sachs SemperMacro London hat began as a means to get free drinks turned into quite a career for Christian Siva-Jothy. Formerly one of the biggest proprietary traders on the Street, Siva-Jothy admittedly got into the business because going to bank presentations while at university was an inexpensive way to finance a social life. More interestingly, his first job on a foreign exchange desk at Citibank was the day of the stock market crash in 1987. Rather than taking it as an inauspicious sign, Siva-Jothy immediately knew proprietary trading was what he was meant to do.

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He moved to Goldman Sachs (GS) a few years later, where he eventually became the partner in charge of fixed income and currency proprietary trading. Goldman Sachs in the early 1990s hardly lived up to its century-old image as a staid investment bank making money through old-line relationships. Rather, it turned into one of the biggest proprietary risk takers among the investment banks, with its traders making huge bets with firm capital in global fixed income, foreign exchange (FX), commodities, and derivatives. I first met Siva-Jothy when he was still head of proprietary trading at W 71 72 INSIDE THE HOUSE OF MONEY Goldman Sachs. A friend suggested I contact him, after dubbing him “the man.”

Rogue Trader
by Nick Leeson
Published 21 Oct 2015

Of course, a big investor like Warren Buffet makes all his money on long-term investments, and any fund manager will always point to ten-year performance charts, but then a lot of other big investors, like George Soros, make most of their money on a two- or three-day punt: and the beauty of it is that it’s instant profit. Plus – if you’re a dealer – it all goes into the pot for your bonus. When you make your own decisions about when to buy and sell, it’s called ‘proprietary trading’. I wanted to move into proprietary trading, but for the first year I was content to be an order-filler for Fernando in Tokyo and our Singapore clients. It is a stressful job, since you have to balance all the trades and ensure that you do not take any risk on to your own book, but you do not have the stress of running a large position, of taking a gamble.

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Each day we put a request over to London for a cash transfer to meet our clients’ daily margin payments and any proprietary positions held. We didn’t officially do proprietary trading, since Mike Killian thought it might scare some clients away (specifically, clients who suspected we might put ourselves in front of their orders and gain from the subsequent market move, a practice known as ‘front running’). However, Barings had been very active in proprietary trading from the day that I arrived in 1989. Most of this trading was booked through Fernando’s books in Japan, but we kept it quiet, and in fact there never was any front running.

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My trouble with Kim’s contracts was that they were just too big to hide, and everyone had gone home by the time I’d found them. My dabble in Error Account 88888 had been a useful way to buy time. But my main preoccupation then was not the forty contracts, but how best to help Su Khoo, a Malaysian trader who was the options dealer and Head of Proprietary Trading for Baring Securities in Tokyo. The crucial significance of this was that Su Khoo was a proprietary trader: she bought and sold large numbers of Nikkei contracts. The deals I did were all booked to her account in Tokyo, and she would check them – and if they looked out of balance she would cut the position.

Electronic and Algorithmic Trading Technology: The Complete Guide
by Kendall Kim
Published 31 May 2007

Humans make the final trading decisions and the parameters behind implementing them, but computers may calculate algorithms that route the order flow efficiently and in many cases, computers help the breakdown of trades to each individual stock within the program. 1.2 The Emergence of Electronic Trading Networks Algorithmic trading has become another method for large brokerage firms to grasp an advantage over their competitors for lower-cost executions; however, smaller players such as agency brokers also see algorithms as a way to level the playing field and infringe on the bigger bulge-bracket firms. Algorithmic trading originated on proprietary trading desks of investment banking firms. It began to expand executing client orders because of new markets and the need to remain in line with new players in the brokerage industry. This has created a more competitive environment for traditional dealers with services such as direct market access through the Internet.

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They will also use statistics and trade data based on internal algorithmic flows to determine transaction costs and market impact costs. Smaller niche brokers may go with vendor solutions that charge a flat fee. Agency brokers feel they have an advantage in providing nonproprietary services that service the customer alone. A bulge-bracket firm may utilize client flow analyzing the data for their own proprietary trading desk. The large broker-dealers still dominate the algorithm market, but agency brokers are gaining momentum due to their neutral stance.7 7 Daniel Safarik, ‘‘Algorithmic Trading: Somehow, It All Adds Up,’’ Wall Street & Technology, August 7, 2006. Chapter 6 Algorithmic Feasibility and Limitations 6.1 Introduction Algorithms are most effective and feasible for trades too small to focus on, or too liquid for a human trader to add impact or add significant value.

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Electronic blue sheets must be reported within 10 business days of a request regarding data going back up to two prior years. The types of securities that can potentially be requested include stocks and stock options. All exchanges and markets in an equity or option include domestic exchanges, OTC, or international exchanges. Both proprietary trades and customer trades must be reported. The types of transactions include buy, sell, sell short for cash trades, and open, close, long/short positions for options. Cancels must be recorded for both cash trades and options. Daily Program Trading Report (DPTR) Members and member firms are required by the NYSE to submit transactions that would qualify as a ‘‘program trade.’’

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street Are Destroying Investor Confidence and Your Portfolio
by Sal Arnuk and Joseph Saluzzi
Published 21 May 2012

Their business model and short-term, day-trading focus seeded the market structure we have today. Maschler headed Datek Securities, a proprietary trading firm. With the help of two boy wonders, Jeff Citron and Josh Levine, Maschler in 1989 created Watcher. Watcher was a software program that enabled day traders to take advantage of a weakness in the SOES system—relatively slow updating of price quotes. While SOES was intended for small client orders, Datek used SOES, in combination with Watcher, to execute larger, proprietary trades, buying stocks and then selling them within seconds. Datek was very successful. By 1996, it had 500 traders, many of them fresh out of Ivy League schools, making as much as $750,000 a year each.4 Datek gurus Citron and Levine developed the Island electronic communication network (ECN) in 1997 to complement their usage of SOES.

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• If you are a professional investor, there’s a reason why your brokerage firm charges you only a half a penny a share if you use a volume weighted average price (VWAP) or percentage of volume (POV) algorithm to execute your trades. (Algos slice a large order into hundreds of smaller orders and feed them into the market.) It’s because your orders are fed to proprietary trading engines that make money off of you. Their algo figures out how your algo works, forcing you to pay more for buys and receive less for sells. • And if you are an agency broker, like we are, there’s a reason why some big brokerage firm salesmen offer their VWAP algo for free! It’s because their firm has a way to make money by disadvantaging your orders all day long.

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While Instinet charged a flat commission rate for all executions, Island paid traders for adding limit orders to its order book and charged traders only if they crossed the spread and executed against another limit order. For the first time, traders were paid just to bring their orders to a market center. Island grabbed 15% market share of NASDAQ trades by 1998 and was later bought by NASDAQ.5 Harvey Houtkin’s brokerage firm, All-Tech, another proprietary trading firm, in 1998 created an ECN called Attain, for the same reason Datek created Island. In 2005, Attain was sold to Knight Trading, which renamed it Direct Edge. Knight then sold stakes in Direct Edge to Goldman Sachs, Citadel Investments, and the International Securities Exchange (ISE). Today, Direct Edge is one of the four major exchange families in the United States.

Why I Left Goldman Sachs: A Wall Street Story
by Greg Smith
Published 21 Oct 2012

The reforms Wall Street is pushing back the hardest against are in the areas it knows are the most profitable: opaque derivatives and proprietary trading. But these also happen to be the areas that are most dangerous to the stability of the financial system. The Wall Street lobby has already spent more than $300 million trying to kill measures to regulate derivatives (so that they are brought into the light of day and become transparent on exchanges), and to eliminate proprietary trading so banks can no longer bet against their customers using their information advantage as prescribed by the Volcker Rule. Wall Street hates transparency and will fight as hard as possible to prevent it from coming.

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Principal: The person or entity who takes the other side of a client’s trade—i.e., commits the firm’s own capital to facilitate the trade. Also see: AGENT. Proprietary trading: Engaging, as an investment bank, in trading securities for one’s own account with one’s own money to make a profit much like a hedge fund. This is opposed to facilitating trading for one’s customers. The Volcker Rule in the Dodd-Frank Act seeks to outlaw proprietary trading because of the role it played in the lead-up to the financial crisis in 2008 and because of the inherent conflict of interest with client trading. Put option: A type of derivative that gives the purchaser the right to sell an underlying security at a stipulated price in the future.

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You’re done/you’re filled: Your trade has been executed; your price will follow shortly. * In a continuing war against the Volcker Rule, which seeks to end proprietary trading, the investment banks defend principal trading, saying they need to hedge themselves after they’ve facilitated a client trade as a market maker. In fact, what often happens is banks use the cover of this “hedging” to then express their views via proprietary trades. ** A credit-default swap is a type of derivative that acts like an insurance policy against the default of a company or sovereign nation. About the Author GREG SMITH resigned in the spring of 2012 as the head of Goldman Sachs’s U.S.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
by Tim Lee , Jamie Lee and Kevin Coldiron
Published 13 Dec 2019

Once again, this is a generalization; undoubtedly some of the larger funds, particularly those with in-house investment staff, do engage in carry. However, we do not believe that they are an important structural source of the secular growth in carry strategies. The Agents of Carry 77 Global Investment Banks’ Proprietary Trading Highlights the Power of the Compensation Incentive Prior to the implementation of the Volcker Rule in 2014, which required banks to close most proprietary trading operations, investment banks2 operated very large proprietary trading desks. Of course, there was a vast array of compensation arrangements, but the broad structure was an annual bonus linked to profit and loss with no “giveback” for subsequent losses.

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As it turned out, 2008 was a terrible year for carry strategies and coincided with a run on investment bank liabilities, with the result being the welldocumented global financial crisis. That these institutions still engaged in carry strategies despite having liabilities ill-suited to them speaks to the power of the compensation incentive in driving investment strategy. Since 2014, the scale of investment bank proprietary trading has been reduced. Anecdotal evidence suggests that many proprietary trading groups have simply joined hedge funds. Others suggest that “prop” positions are still present but better hidden within other allowable parts of banks’ books. These claims are not easily verified. Given the Volcker Rule and the increased regulatory focus on systemic risk, it seems unlikely that banks have been a meaningful source of carry growth in the last several years, and this is not likely to change. 2.

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See also currency carry trades bailouts of, 197, 198 central bank balance sheets as, 216–217 in commodities, 128–129 credit growth and, 37–42 in dollars, 14–23, 15f, 16f Euro-funded, 31 exchange rate stability and returns from, 52 INDEX by Federal Reserve, 103 government policies and returns from, 48 by hedge funds, 73–75 leverage in, 33–35 leveraged buyouts as, 78–80 as liquidity-providing trades, 35–36 measuring flow of, 41 non-currency forms of, 34 oil, 128–133 profit explanation attempts for, 48 sovereign wealth funds and, 75–76 S&P 500 as, 160–162 carry trades characteristics of, 3–5 defining, 2 risk of, 3, 5 sawtooth return pattern of, 4 short volatility of, 4 types of, 4 cash yields, 204 CBOE (Chicago Board Options Exchange), 57 CDOs (collateralized debt obligations), 36–37, 95, 135 CDS (credit default swap), 34, 36, 135 celebrity, 186, 187 central banks balance sheets of, as carry trades, 216–217 carry and, 5–8 carry regime and policies of, 86–89, 107, 208, 210 carry regime and power of, 123 carry regime collapses and, 215–216 carry regime weakening, 7 credit demand and, 13 deflationary pressures and, 115 foreign exchange markets and, 11, 13, 20 interventionist policies of, 201–202 liquidity and, 110–111 market stabilization by, 5–6 moral hazard and, 195, 200 volatility selling by, 101–105 Chicago Board Options Exchange (CBOE), benchmark indexes by, 57 China, 19 circular flow of dollars, 18–19, 18f classical equilibrium model of economy, 142 currency carry trade returns and, 10 223 collateralized debt obligations (CDOs), 36–37, 95, 135 Columbia MusicLab, 181–182, 184, 188 commodities, carry trade in, 128–129 compensation incentives hedge fund strategies and, 73 proprietary trading and, 77 constant leverage, 93 consumer price index, Turkey, 44 consumption utility, 100 corporations carry strategies by, 80–83 debt issuance by, 81–83, 82f, 83f share buybacks by, 82, 83f covered interest parity principle, 21, 22 credit Australia growth of, 40f, 41 availability of, 4 carry bubbles and demand for, 114 carry trades and growth of, 37–42 central bank influence on demand for, 13 debt levels and demand for, 114 interest rates and demand for, 110 moral hazard issues and, 199 credit booms, currency carry trades contributing to, 13 credit bubbles carry bubbles and, 37–38, 41 mid-2000s, 36 credit carry trades, risk mispricing and, 35–37 credit default swap (CDS), 34, 36, 135 credit demand, 13 credit derivatives, 135 cross-currency basis, 22 cryptocurrencies, 211, 212 cumulative advantage carry as, 181–184 evolution and, 188–190 self-perpetuation and, 186–188 currency carry trades, 9, 129 academic interest in, 47–49 covered interest parity principle and, 21–22 credit bubbles and, 36 credit creation by, 20 current account deficits and, 17 emerging markets and returns from, 55 equity carry correlation with, 56–59, 58f 224 currency carry trades (continued) equity volatility and returns from, 59 exchange rate risks of, 17 exchange rate stability and returns from, 52 expected returns, 10 global financial crisis of 2007-2009 and, 28–29 historical returns, 50–52, 50f, 51f, 53f history of, 23–31, 24f identifying, 11–12 interest rate differentials and returns from, 60–62 Japan and, 17–18 liquidity provision and, 88 liquidity swaps and, 104–105 market pricing efficiency and, 11 money supply effects of, 20–21 net claims as proxy for measuring, 41 portfolio for analyzing, 49–50 real economy links with, 56 United States and, 17–20 volatility signs of collapse in, 215 currency markets, 10 currency risk, 12 currency risk aversion, 13 currency volatility, 62 current account deficit of Thailand, 25 of United States, 17 debt.

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems
by Irene Aldridge
Published 1 Dec 2009

MARKET PARTICIPANTS Competitors High-frequency trading firms compete with other investment management firms for quick access to market inefficiencies, for access to trading and operations capital, and for recruiting of talented trading strategists. Competitive investment management firms may be proprietary trading divisions of investment banks, hedge funds, and independent proprietary trading operations. The largest independent firms deploying high-frequency strategies are DE Shaw, Tower Research Capital, and Renaissance Technologies. Investors Investors in high-frequency trading include fund of funds aiming to diversify their portfolios, hedge funds eager to add new strategies to their existing mix, and private equity firms seeing a sustainable opportunity to create wealth.

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Most of the highfrequency firms are hedge funds or other proprietary investment vehicles 4 HIGH-FREQUENCY TRADING TABLE 1.1 Classification of High-Frequency Strategies Typical Holding Period Strategy Description Automated liquidity provision Quantitative algorithms for optimal pricing and execution of market-making positions <1 minute Market microstructure trading Identifying trading party order flow through reverse engineering of observed quotes <10 minutes Event trading Short-term trading on macro events <1 hour Deviations arbitrage Statistical arbitrage of deviations from equilibrium: triangle trades, basis trades, and the like <1 day that fly under the radar of many market participants. Proprietary trading desks of major banks, too, dabble in high-frequency products, but often get spun out into hedge fund structures once they are successful. Currently, four classes of trading strategies are most popular in the high-frequency category: automated liquidity provision, market microstructure trading, event trading, and deviations arbitrage.

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In decentralized foreign exchange markets, inter-dealer networks consist of inter-dealer brokers, which, like exchanges, are organizations that ensure liquidity in the markets and deal between their peers and broker-dealers. Broker-dealers perform two functions—trading for their own accounts (known as “proprietary trading” or “prop trading”) and transacting and clearing trades for their customers. Broker-dealers use inter-dealer brokers to quickly find the best price for a particular security among the network of other broker-dealers. Occasionally, broker-dealers also deal directly with other broker-dealers, particularly for less liquid instruments such as customized option contracts.

Broken Markets: A User's Guide to the Post-Finance Economy
by Kevin Mellyn
Published 18 Jun 2012

The largest single source of interbank payments is foreign exchange trading. While obtaining foreign exchange is necessary for persons and firms engaged cross-border business and travel, such transactions are a small percentage of turnover, perhaps as little as 1 percent. What accounts for the other $1,000 trillion? The answer is called professional or proprietary trading if you are a banker, but raw speculation or gambling if you are almost anyone else. Going back to our movie, remember that this vast disparity between the financial economy and the real economy is essentially new—a product of financial innovation on one hand and the severing of the last constraints on money creation on the other.

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What was new was its sheer scale and its sources.The financialized wealth of the 1982–2007 boom was concentrated in two types of people: the beneficiaries of stock-based compensation granted by public companies—itself a result of efforts to curb the cash compensation of executives—and participants in the financial services industry itself, especially investment bankers. This wealth, unlike the finance capital of Marx’s day that built the industries of America and railroads around the world, got recycled into more financial trading and risk taking to an extraordinary extent. Partners’ funds accumulated in investment banks fed ever more sophisticated proprietary trading operations. Hedge funds—essentially private investment clubs betting on the skills or connections of a stock manager—became real forces in the capital markets. Even conservative long-term investors such as pension funds, insurance companies, and university endowments put money into these vehicles, despite the utter lack of transparency and the high fees charged by their managers at the height of the bubble.

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Interbank trading of foreign exchange became one of the largest markets in the world, and remains such, with trillions turning over every day. Again, a new profit center for the largest banks was born. Although the real commercial needs of customers were at the bottom of all this activity, most bank trading desks were mainly engaged in proprietary trading, betting the bank’s own capital. As time went on, this expanded into other markets, such as financial futures, bonds, and even commodities. On the whole, the general public, politicians, and regulators tend to think that a bank is a bank, and though few understand how a bank really works, they assume that it makes its living taking deposits and making loans.

The Cost of Inequality: Why Economic Equality Is Essential for Recovery
by Stewart Lansley
Published 19 Jan 2012

From the middle to the end of the 1990s, a number of banks—from Salomon Brothers and Goldman Sachs to Merrill Lynch and Drexel Burnham, Lambert—started to operate their own proprietary trading arms using the firm’s own rather than their customers’ money and investing mostly at the high risk end of the market. In this way profits were siphoned off to finance takeovers, invest in hedge funds or bet on commodities and currency movements. Such activity undoubtedly added considerable risk to the system as a whole. Nick Leeson, for example, was a key member of Barings proprietary trading team and at least some of the money he was investing came from the proprietary trading budget. As the investment banks were very lightly regulated, the authorities mostly had little idea about the scale or character of such activity.

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vlnk=993. 326 Don Young, ‘FTSE 100—the largest companies’, 2007. 327 D Young and P Scott, Having Their Cake, How the City and Top Managers are consuming British Industry, Kogan Page, London, 2004. 328 Andrew Tylecote and Paulina Ramirez, UK Corporate Governance and Innovation, Sheffield University Business School, Discussion Paper, 2004. 329 Ozgur Orhanguzi, ‘Financialisation and capital accumulation in the non-financial sector’, Cambridge Journal of Economics, 2008. 330 H Williams, Britain’s Power Elites, Constable, 2006, p 169. 331 T Dolphin, Financial Sector Taxes, IPPR, 2010, p 14. 332 Ibid. p 15. 333 J G Palma, ‘The Revenge of the Markets on the Rentiers’, Cambridge Journal of Economics, vol 333 issue 4, 2009. 334 Absolute Return, April 2010. 335 J Chapman, Phasing Out Hedge Funds, Public Policy Research, March-May, 2010. 336 A Hilton, ‘Hedge Funds’ Market Spoiler, Evening Standard, 12 May 2004. 337 Mansion House Speech March 2010 Available at http://archive.bis.gov.uk/newsarchive/nds/clientmicrosite/content/Detail.aspx-ReleaseID=411720&-NewsAreaID=2&ClientID=431.html. 338 Henry Hu and Barnard Black, Hedge Funds, ‘Insiders and Empty Voting’, Finance Working Paper, No xx/2006, European Governance Institute, p 12. 339 J Crotty, G Epstein and I Levin, ‘Proprietary Trading Is A Bigger Deal Than Many Bankers and Pundits Claim’, Policy Note No 15, February, 2010, Political Economy Research Institute, University of Masschusetts. 340 M Lewis, Liar’s Poker, Coronet, 1991, p 141. 341 Cowen, op. cit. 342 Sir John Gieve, The City’s Growth: The Crest of a Wave or Swimming with the Stream?

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Many of these companies started to handle only clients offering substantial sums. In the UK, for example, the wealth management firms Fleming Family and Partners, JO Hambro and Sarasin only handle a group known in the industry as ‘ultra high net worth’: those with assets to spare of at least £10 million. Some of the money supported proprietary trading desks in investment banks. Yet using the banks’ own capital in this way loaded additional risk and potential conflict. ‘Not only do they risk putting their own interests before those of their clients’, as the Economist magazine argued in 2007, ‘they are also increasingly exposing themselves to the dangers of an abrupt turn in the credit cycle.

Risk Management in Trading
by Davis Edwards
Published 10 Jul 2014

However, a couple types of trading desks are operated as their own line of business. The most prominent of these are mutual funds, hedge funds, and proprietary trading desks at banks. Trading and Hedge Funds 3 Some organizations whose focus is on trading for profit are: ■ ■ ■ Mutual Funds. Mutual funds are a pooled‐investment fund where the leadership of the fund manages investments on behalf of investors. These funds are restricted from many investment strategies deemed too speculative or risky for uninformed investors. Proprietary Trading Desks. A trading desk found in many investment banks that operates like an internal hedge fund to invest the firm’s capital.

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Over time, that most risk management is focused on analysis rather than making decisions. In most risk management texts, there is very little discussion on what decisions are made as the result of analysis. My first exposure to risk management came when I worked as a programmer on JP Morgan’s proprietary trading desk in the early 1990s. Just before I’d taken that job, I’d left my job at a computer game company and needed a short‐term job to pay the bills. At the time, I intended it to be temporary and lasting long enough for me to raise enough capital to start my own company. My life would have taken a different turn had I ever managed to get that IPO completed.

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Acceptance involves taking on risks and establishing a budget that will cover potential losses. This book focuses on techniques that professional traders use to assist in making decisions. The first three chapters establish the building blocks that are used in the rest of the text. The first chapter introduces trading and two major types of professional traders (hedge funds and proprietary trading desks). The second chapter discusses the major financial markets, and the third describes some of the terminology used by professional traders. The final six chapters of the book describe decisions that are made by traders. Risk avoidance and acceptance are discussed in Chapter 4: Backtesting and Trade Forensics.

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino
by Jim McTague
Published 1 Mar 2011

Clearly, a lot of people thought high-frequency trading (HFT) was a path to quick and easy profits. The general investment public had no idea that this market version of the Invasion of the Body Snatchers was under way. Some of the biggest players in the high-frequency trading sector were not household names: They were proprietary trading firms such as Getco and Tradebot and hedge funds such as Millennium, DE Shaw, WorldQuant, and Renaissance Technologies. Others were household names, but investors hadn’t paid much attention to their forays into mechanized trading because it was a relatively small portion of their earnings and they did not break out the numbers in their annual reports.

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The scrutiny became so intense that a segment on HFT even ran on Comedy Central’s Daily Show, with make-believe news correspondent Samantha Bee, dressed as a “cash cow,” urging investors to try some HFT before it was banned by the regulators. The segment featured Irene Aldridge, who had written a book on the subject. In short order, HFT became a derisive term. Comically, the industry tried to change its label. One practitioner told journalists that he preferred his firm to be called an “automated proprietary trading firm.” “There have been automated trading firms around since at least the early 1990s. They traded as much as possible with automation, but they also had traders on the floor with handheld computer terminals,” he said. In the midst of the journalistic feeding frenzy, it wasn’t long before reporters discovered Arnuk and Saluzzi’s white paper and launched the pair into the limelight.

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There was nothing particularly flashy about high-frequency traders. A typical proprietary shop consisted of computer jocks, some math and physics wonks, and a handful of old-fashioned traders, many who had cut their teeth either in the push and shove and throat-scraping roar of the commodities and options trading pits in Chicago or on the proprietary trading desks of big New York banks. One thing that high-frequency traders had in common was a preference for the covert life. They preferred life in the shadows as opposed to life in the limelight because they guarded their trading secrets as carefully as anglers protect their favorite fishing holes.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

Much like the Simons team, he pursued numerical precision with a zealous intensity: His staff soon discovered that it was no good telling him that a programming task might take three to eight weeks; you had to say that it would take 5.25, but with an error of two weeks.7 Yet for all these similarities, there were differences between Shaw and Simons too. These proved to be significant. Shaw got into finance via Morgan Stanley’s proprietary trading desk, which hired him to create a computer system to support its quantitative trading. It was 1986, and big things were stirring at Morgan. The firm’s secretive Analytical Proprietary Trading unit ran a computerized effort to profit from short-run liquidity effects in stock markets. As Michael Steinhardt had discovered in the 1970s, a big sell order from a pension fund could push a stock’s price out of line; provided that there was no information behind the sale—that is, provided that the pension fund was selling because it needed cash rather than because it was reacting to bad news—Steinhardt could profit by buying and holding the stock until it rose back to its previous level.

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But in the aftermath of the yen shock, traders’ logic asserted itself once again. Europe’s long-term interest rates spiked up: In the space of a fortnight, the yield on the German government’s ten-year bonds rose by thirty-seven basis points, Italy’s rose by fifty-eight basis points, and Spain’s rose by sixty-two.17 Hedge funds and banks’ proprietary trading desks had lost money on U.S. Treasuries and the yen. They were responding by dumping European bonds, never mind the continent’s economic fundamentals. Once hedge funds began to flee Europe, the stampede built on its own momentum. Brokers that had been willing to lend freely to the shadowbankers suddenly reversed themselves now that their trades were going wrong: Rather than accepting $1 million of collateral, or “margin,” to back every $100 million of bonds, the brokers demanded $3 million or $5 million to protect themselves from the danger that a hedge fund might prove unable to repay them.

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Paul Tudor Jones, whose great strength was to sense how other traders were positioned, failed to spot the danger in Europe, and in the spring of 1994 his fund was down sharply. The same went for the other members of the Commodities Corporation trio, Bruce Kovner and Louis Bacon. David Gerstenhaber, the macro trader whom Julian Robertson had hired in 1991, was by now running his own hot fund; he blew up spectacularly. Proprietary trading desks did badly too; in 1994, Goldman Sachs experienced its worst year in a decade. The insurance industry was reckoned to have lost as much money on its bond holdings as it had paid out for damages following the recent Hurricane Andrew; “I’m starting to call this Hurricane Greenspan,” quipped one insurance analyst.19 For a few hours on March 2, no less a firm than Bankers Trust teetered on the brink of bankruptcy.

Jared Bibler
by Iceland's Secret The Untold Story of the World's Biggest Con-Harriman House (2021)

The prop desk of Kaupþing would buy 90 to 100% of the market volume in KAUP shares all day and every day, gobbling up nearly every share that came across the exchange. And the same pattern holds for the other big banks, Landsbanki and Glitnir, in their own share issues. Since the 1990s, many big banks developed prop desks, short for proprietary trading desks, and these three fast-growing Icelandic institutions wanted to be just like the big boys overseas. In a typical bank, these operations effectively served as in-house hedge funds, placing bets with the bank’s own money. They tried to earn profits through both intraday trading and longer-term positions.

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The open questions from work often follow me right into the open-air hot tubs, and these days I’m thinking: what were the Kaupþing boys doing with all of these shares they were buying up? If I look at just the last year of the bank’s life, for example, more than a quarter of all the Kaupþing shares outstanding flowed through the bank’s own proprietary trading desk, grabbed directly off the exchange in this unprecedented one-sided buying operation. That means roughly a quarter of all the extant Kaupþing shares had crossed the market during these few months, and they were purchased in turn by the bank. But what became of them? The management had to do something with them because if they had declared the buying publicly, then even the sleepy regulator and ho-hum auditors of Iceland would have probably felt the need to ask some questions.

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The word appears to refer to the most senior executives of the bank, in this case the CEO and executive chairman. But what doesn’t make sense to me at all is that it’s also the name of a trading portfolio. Why would these top executives require their own trading book? Didn’t they have other things to do at work? How did they have time to think about trades at all? Didn’t they trust their proprietary trading desk to take care of this? After all, those are the guys they paid to take risks with the bank’s money. After the usual delaying and dissembling, Kaupþing agrees to send us the trading books of the YFST, which, sure enough, is stuffed with shares of Kaupþing itself. These, like the others, were bought to keep the price high, this time in the name of the CEO of the bank.

Ethics in Investment Banking
by John N. Reynolds and Edmund Newell
Published 8 Nov 2011

In addition, many investment banks take principal positions (that is, they make investments) either as a specific investment strategy for themselves or to facilitate client business. This is also a major driver for profitability – and for some investment banks it has become the major source of profits. The opportunity to benefit from market presence and understanding has helped many investment banks grow significantly, and some have groups, engaged in proprietary trading, that are remunerated and behave in a very similar way to hedge funds. This activity is not in any way novel for investment banks, although the balance of activities has changed considerably over time. From an ethical perspective, capital market activities and fulfilling market demands for services can be seen as potentially beneficial: facilitating commerce, encouraging market efficiency and providing essential services on more or less competitive terms.

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The Dodd–Frank Act specifically aims to end “too big to fail” by a combination of measures, including regulation and supervision, a levy to be paid by major financial institutions to create an Orderly Liquidation Fund and provisions for orderly liquidation. The Act does not, however, set a limit on the size of financial institutions, including investment banks. The Volcker Rule, also part of the Dodd–Frank Act (and named after its proponent, Paul Volcker, the former Chairman of the US Federal Reserve), restricts proprietary trading activities of banks (deposit-taking institutions), aimed at reducing risk-taking from deposit-taking. This rule has certain limitations, for example when determining hedging activities and when market-making. The likely impact of these limitations is currently unclear. The UK’s approach to legislative reform has been slower than in the US.

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At times, it may hold them for significantly longer, but this is likely to be very much when it is taking an 66 Ethics in Investment Banking investment view on the securities concerned, and thus goes beyond “pure” market-making. In some jurisdictions, there may be tax advantages to holding shares as a market maker, even if in reality a shareholding may be part of a proprietary trading position. The question of how an investment bank is viewed – as one of a number of market participants or alternatively as an orchestrator of the market – will influence how investment banks are expected to deal ethically with trading counterparties, whether fee-paying clients or non-fee-paying customers.

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Published 10 May 2010

This reform would make the financial system less interconnected, and therefore less prone to the kind of systemic chain reactions that lead to widespread failures. In order to stabilize the system even further, all banks—including investment banks—should be forbidden to practice any kind of risky proprietary trading. Nor should they be permitted to act like hedge funds and private equity firms. Instead, they should confine themselves to doing what they’ve done historically: raising capital and underwriting offerings of securities. The kind of proprietary trading that many investment banks now do, never mind hedge fund operations, should be the franchise of hedge funds alone. But like the investment banks, hedge funds would not be permitted to engage in large-scale short-term borrowing from banks and other financial institutions.

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These firms are understandably reluctant to see these instruments’ trading moved from dealers’ markets onto exchanges: doing so would deprive them of the ability to extract the kind of profits that come with having access to information their clients lack. Under the current system, firms can very easily charge high bid-ask spreads because there is no price transparency; they can effectively “front run” their clients, meaning that they can use information about their clients’ investments to make money in other departments, such as in proprietary trading or even in the actual market-making and market-dealing activities. Greater transparency will frustrate those sorts of behaviors. Skeptics might reasonably point out that if investors want to pay through the nose for the privilege of alpha—or schmalpha—returns, that’s their business. But the rise of a small coterie of incredibly powerful, opaque financial firms has generated a far more unsettling problem.

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We are now in the worst of all worlds, where many TBTF institutions have been bailed out and expect to be bailed out in any number of future crises. They have as yet faced no sustained regulatory scrutiny, and no system is in place to put them into insolvency should the need arise. Even worse, many of these institutions—starting with Goldman Sachs and JPMorgan Chase—are starting to engage once more in “proprietary trading strategies,” which are complicated bets on stocks, bonds, commodities, and derivatives driven by algorithms devised by the firm’s traders. Some of these “prop trading” strategies are risky, yet firms have resumed them while remaining under the protective umbrella of a dozen different government support programs.

When Free Markets Fail: Saving the Market When It Can't Save Itself (Wiley Corporate F&A)
by Scott McCleskey
Published 10 Mar 2011

Chief among these is the proposed prohibition against ‘‘proprietary trading’’ by commercial banks. Proprietary trading is generally the activity in which a firm bets its own money rather than that of its client. But laws have to be precisely written, and proprietary trading is a lot more difficult to define when looked at with a regulatory microscope. For example, some firms use proprietary trading to acquire stock which they will later sell to their clients, or will buy from a client when there isn’t sufficient demand to sell the client’s stock at a good price. Proprietary trading, it turns out, is another one of those ‘‘know-it-when-I-see-it’’ things.

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See also Troubled Asset Relief Program (TARP) accountability of senior management and boards, 22 Anti-Trust Division of Justice and phone market, 17–18 anti-trust powers/legislation, 18 assets weighted by level of risk, 16 banks, keep them small, 17–18 bonds, arbitrage between prices of, 16 capital cushion requirements, 17 capital requirements, increase, 19–20 commercial vs. investment banking activities, 18 conclusion, 22–23 do nothing, 22 financial disclosures, mandatory, 19 Glass-Steagall Act, bring back, 18–19 government intervention vs. free market principles, 17, 21 government support is swiftest, 23 hedge funds, 16, 19, 102, 105, 157–58 highly leveraged firm, 16 Long Term Capital Management, 16 market capitalization, 16 moral hazard encourages inordinate risks, 22 pay limits for officers, 20 n 191 Plan B, 10, 20, 22, 30, 81, 144 policy options, 17–22 proprietary trading by commercial banks, 19 Resolution Authority, 20–22 risk of unknown loss, 21 Sherman Anti-Trust Act, 18 systemic risk, identify, 22 too-big-to-fail concept, 15–17 Volcker, Fed Chairman Paul, 18–19 Volcker Rule, 19 Insurance Core Principles, 140 International Association of Insurance Supervisors (IAIS), 140–41 International Organization of Securities Commissioners (IOSCO), 140 international regulations Asia, regulatory initiatives in, 136 Basel Committee for Banking Supervision (BCBS), 140 Code of Conduct Fundamentals for Credit Rating Agencies, 140 conclusion, 141 EU privacy laws, 137, 141 Europe, stock exchanges in, 135 The European Union, 136–38 Financial Stability Board (FSB), 54, 139– 40, 184–85 FSA’s Handbook of regulations, 138 global markets, interconnectedness of, 134 herd mentality (short-term market movements), 134 Insurance Core Principles, 140 International Association of Insurance Supervisors (IAIS), 140–41 International Organization of Securities Commissioners (IOSCO), 140 international organizations, 139–41 Markets in Financial Instruments Directive (MiFID), 136 overseas regulators, 135–39 privacy laws, 134–35, 137, 141 Prospectus Directive governs filing requirements, 137 regulation, principles based vs. rulesbased, 138–39 SEC and shift toward principles-based regulation, 138 Sunday is the new Monday, 133–35 U.S.

Fault Lines: How Hidden Fractures Still Threaten the World Economy
by Raghuram Rajan
Published 24 May 2010

For instance, banks should not attempt to use client assets that are pledged to them in their prime brokerage units (units that lend securities, offer loans, and undertake asset-management functions for clients, typically hedge funds) in further transactions.11 The commingling of client assets with the bank’s own funding activities reduces transparency, increases risk, and was an important reason why many investment banks experienced runs in the current crisis, as clients tried to withdraw their assets before they got entangled in the bank’s bankruptcy. Of course, such a separation would increase a bank’s cost of borrowing, but the benefits here might outweigh the costs. Proprietary trading—in which the bank uses its balance sheet, partly funded by government-insured deposits, to take speculative positions—is another activity that has come in for censure. The reason critics want to ban it is, in my view, wrong, but there is another reason to consider limiting it. Critics argue that proprietary trading is risky. It is hard to see this as an important cause of the crisis: banks did not get into trouble because of large losses made on trading positions.

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Nevertheless, there is another reason for considering ways to limit proprietary trading. Banks that are involved in many businesses obtain an enormous amount of private information from them. This information should be used to help clients, not to trade against them.12 Banks effectively have an unfair informational advantage over the rest of us in trading: they can use inside information, despite the presence of firewalls within a bank that are meant to prevent sensitive client or market information from being shared with traders. This advantage should be reduced by limiting proprietary trading. I say limiting because some legitimate activities, including hedging and market making, could be hard to distinguish from proprietary trading.

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I say limiting because some legitimate activities, including hedging and market making, could be hard to distinguish from proprietary trading. A crude overall limit on a bank’s trading for its own account, no matter what the purpose, is one possibility, but it suffers from the same problems as any crude limit has. Perhaps an initial crude limit, refined over time with experience, as was the case with capital requirements, may be the way to go. The best way to keep institutions from becoming systemically important might not be through crude prohibitions on size or activity but through the collecting and monitoring by regulators of information about interinstitution exposures as well as risk concentrations in the system.

The Bank That Lived a Little: Barclays in the Age of the Very Free Market
by Philip Augar
Published 4 Jul 2018

Barclays Capital had swung round from a quarter of a billion pounds profit in 1997 into a quarter of a billion pounds loss in 1998, and for several months its chief executive was a chastened man. When they met, Diamond told Middleton he had learned the lessons of the Russian losses. With Taylor, he had made a distinction between using the bank’s own money in proprietary trading, and trading to execute client orders. He had closed proprietary trading straightaway and was committed to building a great business. Taylor had barely trusted Diamond but Middleton took a different line. He had come across plenty of brash Americans in his time but Diamond was different. He decided Diamond owed the bank one and would repay straight dealing with straight dealing.

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Obviously Diamond was financially incentivized to stay at Barclays. A nagging voice inside Taylor warned: ‘Well, he would say that, wouldn’t he?’ It was another existential moment for Barclays and as before the investment bank was the cause of it. In the end Taylor decided to believe Diamond, but emerging markets activity would have to be curtailed, proprietary trading groups disbanded and credit limits cut.3 He told him that it was his responsibility to ensure that people in his division stuck to the rules. One more instance of Barclays Capital breaching its limits or breaking the rules in any other way would be the end of Diamond’s career at Barclays. ‘And probably mine too,’ he thought.

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This was the world of derivatives, the business that was still in its infancy when Camoys founded BZW but that now underpinned Barclays’ profits. Effectively bets on the future movements of stocks, currencies, interest rates, commodities and other assets, derivatives were used to hedge the bank’s own risk, to create complex packages for clients and for proprietary trading. The sums involved were enormous: Barclays’ derivatives based on the future movement of interest rates were, for example, £4 trillion. The real exposure was reduced by offsetting equal and opposite positions but the numbers were so large that any error could be fatal. Ten pages of the accounts were devoted to summarizing the derivatives book, but they were just headings and numbers on the page.

Why Aren't They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis
by Kevin Rodgers
Published 13 Jul 2016

Maybe we should formally team up with small regional banks in Asia to provide FX prices to their customers? They would provide the sales force and would deal directly with their clients before passing on the risk to Deutsche Bank, which would, in effect, become a wholesaler. Maybe we should increase profitability by doing more proprietary trading? So much flow was passing through the books that, if it were properly analysed, we should be able to glean sufficient clues to enable Deutsche to trade at a profit on its own account. But it was the electronic strategy that won out – partly of course because this was what Hal had planned from the first.

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The introduction of the Troubled Asset Relief Program (TARP) halted the panic by effectively guaranteeing US banks, but the damage had been done. Although it did not need direct support from any government and by so doing joined the ranks of the world’s best-run banks, Deutsche Bank lost €8.5 billion in its trading businesses in 2008 having ‘recorded significant losses in credit trading, equity derivatives, and equities proprietary trading’ despite ‘strong results in more liquid, “flow” trading businesses including foreign exchange, money markets and commodities’.39 The performance of the businesses I was associated with gave me some sense of pride, but it was not a lot of comfort. Deutsche Bank’s stock price, which had been as high as €89.80 earlier in 2008, plummeted to a low of €18.59.40 The scale of the losses was in sharp contrast to the bank’s still reasonable-looking VaR (the loss figure that should only be exceeded one day in a hundred, remember), which averaged €122 million during the year.41 I asked one senior risk manager if his department was still going to calculate VaR despite its obvious and complete failure.

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Ultimately success or failure seems to have come down to managerial competence or plain luck rather than the banks’ business models. Regardless, regulators have made a somewhat half-hearted attempt to mandate more separation of investment and retail banking without resorting to a 21st-century version of Glass–Steagall. Within the Dodd–Frank bill in the US the ‘Volker rule’ bans proprietary trading by deposit-taking banks. In the UK, the Vickers report recommended that banks’ retail activities be ‘ring-fenced’ from any investment banking. Similar proposals are included in the 2012 Liikanen report into EU banking. My own view is that a full separation would be a good thing and that banks should be smaller.

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again
by Nicholas Dunbar
Published 11 Jul 2011

Over the following twenty-five years, the outside world would catch up with the eggheads in the ivory tower. Finance academics who had clustered around Merton at MIT (and elsewhere) moved to Wall Street. Trained to spot and replicate mispriced options across all financial markets, they became trading superstars. By the time Meriwether left Salomon in 1992, its proprietary trading group was bringing in revenues of over $1 billion a year. He set up his own highly lucrative hedge fund, LTCM, which made $5 billion from 1994 to 1997, earning annual returns of over 40 percent. By April 1998, Merton and Scholes were partners at LTCM and making millions of dollars per year, a nice bump from a professor’s salary.

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They essentially told him, “Get in line, we’re so busy, you’re a trader, not a banker—why don’t you suck up to us?” Usi was enraged; he felt his prized CDO rating was being delayed for petty reasons. If that wasn’t bad enough, he was getting pounded by his boss for not having kept up with the innovations of their competitors. The idea of running the CDO money machine like a proprietary trading desk was being implemented at UBS. “Why are they making all this money?” Diamond railed. “Why can’t you do the same thing? Everyone tells me you’re smart, but maybe you’re not.” Fortunately for Usi, the commercial pressure he was under to close deals was now being felt in the ratings agency world, and a new player was going to give him some game.

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Perhaps by buying some of the structured products Barclays was peddling, LB Kiel could get some instant diversification. The only drawback was that the $15 billion portfolio that Usi managed on Barclays’ behalf was mostly speculative grade, ranging from double- to triple-B in quality. That earned his proprietary trading desk a nice yield of around 2 or 3 percent above government bonds, but it was too risky for the Germans. However, if they could get access to Barclays’ assets but have them “sanctified” with a Fitch investment-grade rating, that would be just right. And so, in the summer of 2000, the LB Kiel board listened to a presentation by Barclays, offering a structured product with a lifetime of thirty years.

The Quants
by Scott Patterson
Published 2 Feb 2010

After five years, he left the seminary to earn a Ph.D. in astrophysics from the University of Pittsburgh. By the early 1970s, Tartaglia found himself working on Wall Street as a retail broker at Merrill Lynch. After Merrill, the peripatetic Tartaglia went to five other firms before landing at Morgan in 1984. He renamed the group he’d taken over Automated Proprietary Trading, or APT, and moved it to a single forty-foot-long room on the nineteenth floor in Morgan’s Exxon Building headquarters in mid-town Manhattan. Tartaglia added more automation to the system, linking the desk to the New York Stock Exchange’s Super Designated Order Turnaround System, or SuperDOT, which facilitated computerized trades.

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PDT’s quants had largely discovered how to implement the strategy on their own, but there’s little question that by the time Midas was up and running, the idea of stat arb was in the air. Doyne Farmer’s Prediction Company was running a stat arb book in Sante Fe, as were D. E. Shaw, Renaissance, and a number of other funds. Over the years, however, few stat arb funds would do nearly as well as PDT, which in time became the most successful proprietary trading desk on Wall Street in terms of consistency, longevity, and profitability. Midas focused on specific industries: oil drillers such as Exxon and Chevron, or airline stocks such as American Airlines and United. If four airline companies were going up and three were going down, Midas would short the stocks going up and buy the stocks going down, exiting the position in a matter of days or even hours.

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The market couldn’t avoid the Truth. Or so he thought. By the early 2000s, the hedge fund industry was poised for a phenomenal run that would radically change the investment landscape around the world. Pension funds and endowments were diving in, and investment banks were expanding their proprietary trading operations such as Global Alpha at Goldman Sachs, PDT at Morgan Stanley, and Boaz Weinstein’s credit-trading shop at Deutsche Bank. Hundreds of billions poured into the gunslinging trading operations that benefited from an age of easy money, globally interconnected markets on the Money Grid, and the complex quantitative strategies that had first been deployed by innovators such as Ed Thorp more than three decades before.

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

The mission of the organization is “to improve the global trading process by defining, managing, and promoting an open protocol for real-time, electronic communication between industry participants, while complementing industry standards.” ◀ Source: www.fixprotocol.org. * * * 7.2.3 Proprietary Operations The proprietary trading operations of a brokerage firm include all trading activities that the firm conducts for its house account. For pure brokers, these activities primarily include cash management and the borrowing and lending of securities. If the firm also engages in principal trading as a dealer, speculator, or arbitrageur, the proprietary trading operations of the firm include these activities. * * * ▶ Graduated College and Thought You’d Never Have to Take an Exam Again?

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• How do you solve the settlement credit problem when you want to buy a used computer advertised by an individual in an eBay Internet auction? • What is the difference, if any, between proprietary trading and dealing? Should we allow brokers or dealers to sell information about their order flows and their limit order books to proprietary traders? Should we allow dealers to use computers to process this information for their own benefit? • What obligations do brokers have to their clients when they send orders to dealers who have large proprietary trading operations? • Most people obtain advice about investments and about financial planning from brokers. The brokers usually do not charge them specific fees for these services.

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They may arrange their own trades, they may have others arrange trades for them, or they may arrange trades for others. Proprietary traders trade for their own accounts, and brokers arrange trades as agents for their clients. Brokers are also called agency traders, commission traders, or commission merchants. Proprietary traders engage in proprietary trading, and brokers engage in agency trading. Traders have long positions when they own something. Traders with long positions profit when prices rise. They try to buy low and sell high. Traders have short positions when they have sold something that they do not own. Traders with short positions hope that prices will fall so they can repurchase at a lower price.

Getting a Job in Hedge Funds: An Inside Look at How Funds Hire
by Adam Zoia and Aaron Finkel
Published 8 Feb 2008

TRADERS As we’ve stated earlier, one of the misconceptions about hedge funds is that they are all the same—namely, active trading firms that take short-term positions in a variety of securities. Most hedge funds are in fact long-term equity investors, and, while they have in-house traders, they do not have much of a need for day traders who have worked at proprietary trading firms. Those individuals are used to moving in and out c03.indd 26 1/10/08 11:03:19 AM Pre-MBA 27 of positions at a furious pace and making their own decisions. Most hedge funds have portfolio managers and investment professionals who are making those decisions and are therefore not looking for traders to do the investing.

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As you will see in Case Study 6 later in the chapter, the sales and trading programs (be it fixed income or equity) are good training grounds for traders. Equity or debt capital markets also provide exposure to the markets and can be good feeders into a trading position. At a more senior level, traders who have worked on the proprietary trading desks at investment banks would be desirable, as these desks function in a very similar way to hedge funds. Although many traders are content-executing trades, we have seen junior traders groomed into more value-added traders. For the more trading-oriented hedge funds there may be more opportunities for sell-side traders, as they have experience trading based on information flow and momentum.

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Even when I lost money it was a great learning experience and it convinced me that I wanted to trade and manage money. I began to think hard about a change about a year into my program. At the time I was in the equity-linked origination group and knew that I preferred trading to structuring products. I spoke to the proprietary trading desk at my bank, but they couldn’t commit to me so I ventured outside. My first strategy was to contact headhunters. Then I contacted hedge funds directly. In some cases I was able to go on the web sites, find the job postings, and write an e-mail to the head of human resources. I focused on styles that would suit my background—equity, quant, and derivatives.

Dark Towers: Deutsche Bank, Donald Trump, and an Epic Trail of Destruction
by David Enrich
Published 18 Feb 2020

Bill acknowledged to Edson that he missed Wall Street’s adrenaline, but said he didn’t feel ready to return. Edson, however, let it be known just how much money Bill could expect to make. It was a very large seven-figure number per year, considerably more than he’d been earning at Merrill. Bill soon agreed to take the job. He would be the bank’s co-head of proprietary trading—in other words, of making wagers with the bank’s own money—with a focus on derivatives, reporting to Mitchell. Even after signing on, Broeksmit wasn’t sure the effort to rocket Deutsche to the top of Wall Street would actually work. “I thought it would be an adventure,” he told a colleague years later.

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After all, Rajeev and Anshu had been pals for basically their entire lives—and for that matter, Ackermann was also known for tampering with the smoke detectors. Boaz Weinstein was another of Jain’s anointed. He was a brilliant, intense man—a chess master and poker partner to Warren Buffett—who would be polite or nasty depending on his level of respect for you. Boaz, in his early thirties, had a two-headed role. He was overseeing a proprietary trading group—making bets with the bank’s own money—and also managing relationships with a bunch of clients. Deutsche managers and compliance officers had signed off on the setup, but it was a glaring conflict of interest, the type of arrangement that wouldn’t have been acceptable at more established Wall Street firms and that even at Deutsche provoked considerable grumbling.

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The implication was that Ferron—and others in risk management, accounting, technology, and operations—was inferior to the revenue producers, a marginal employee who only sucked money away from the all-important bottom line. During these flush years, Deutsche executives and traders reveled in their cleverness. They had concocted intricate structures designed to throw off big profits, and the structures were working as intended. Alarm bells didn’t go off when proprietary trading went from representing 5 percent to 17 percent of the investment bank’s profits, or when the amount of money at risk on a daily basis spiked higher. The vorstand certainly didn’t try to rein things in. But this success didn’t reflect the bankers’ genius. Banks at the time were able to borrow virtually unlimited amounts of money from a variety of sources—central banks, depositors, the bond markets—at rock-bottom prices.

Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo
Published 3 Apr 2017

If the hedge fund’s bet goes wrong—maybe the Apricard technology has a flaw that allows hackers to steal millions of credit card numbers—and Apricot suffers a 10 percent loss while BlueBerry benefits from its competitor’s woes and enjoys a 10 percent gain, the hedge fund will lose $6 million, wiping out 60 percent of the fund. The power of leverage and short selling cuts both ways. There are currently over nine thousand hedge funds worldwide, managing more than $2 trillion in assets, and an unknown number of hedge fund–like entities at proprietary trading desks and the like. In fact, the hedge fund industry is more like twenty to thirty cottage industries, each with its own particular specialty. The mix of this industry clearly is adaptive to market conditions: new funds are started to take advantage of emerging opportunities from one strategy, while other funds close down after experiencing losses from another strategy.

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Bamberger’s pairs trading strategy was hugely profitable.20 Two years later, Morgan Stanley moved Bamberger’s successful group into the hands of a longtime trader, Nunzio Tartaglia, a Brooklyn-born former Jesuit seminarian with a Ph.D. in astrophysics. (Bamberger left Morgan Stanley acrimoniously as a result of this replacement.) Under Tartaglia, the group—rechristened Automated Proprietary Trading (APT)—increased its bets, and linked itself directly to the New York Stock Exchange through the early SuperDot electronic trading system, making windfall profits. APT’s secrecy became legendary on Wall Street, adding to its mystique. But perhaps its greatest achievement was in 1986, when it hired a young computer science professor from Columbia University named David E.

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The things they were doing in the APT group seemed like a lot of fun—and the salary was about six times as much as I was making as a professor. Until then, I’d never even thought about working on Wall Street, but I wound up saying yes.” Shaw moved to Morgan Stanley as vice-president for automated proprietary trading technology, or as he describes his role in APT, “the guy who did the technology there.” What interested him most, though, was the idea that quantitative and computational methods could be used to beat the market. He was impressed that APT had found even a single profitable trading strategy.

Stress Test: Reflections on Financial Crises
by Timothy F. Geithner
Published 11 May 2014

He believed that the high-flying investment bank culture, fueled by surreal compensation packages that in some ways rewarded short-term risk-taking, had infected traditional banks that now competed for their business. He sketched out a proprietary trading ban on a single page, and pitched it as a simple way to rein in the speculation that he thought had turned Wall Street into a casino. It would be a partial substitute for the old Glass-Steagall restrictions on banks engaging in nonbanking financial activities, an effort to restore the conservative ethos that Volcker recalled from his days as a commercial banker. Larry and I were skeptical. Proprietary trading by banks played no meaningful role in the crisis. For traditional banks that failed, the main problem was traditional loans, mostly mortgage loans.

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On May 10, for example, Senator Levin and fellow progressive Jeff Merkley of Oregon released an amendment they described as a tougher version of the Volcker Rule, along with a supportive statement from Paul Volcker himself. This proved to be a much shinier object than our version, and it became a new litmus test for the left. And our discomfort with Merkley-Levin’s approach to proprietary trading became the latest evidence that we were soft on Wall Street. Merkley-Levin did broaden the definition of proprietary trading beyond what we had proposed, but we didn’t think it was better or in fact tougher than our approach. Its sweeping restrictions would be offset by all kinds of loopholes, making the amendment vastly more complicated than Volcker’s one-page synopsis and much more difficult to implement.

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President Obama never pushed me to support bad policy for political reasons, but he did ask us to try to avoid gratuitous attacks on Democrats when we fought bad proposals with popular appeal. And he did keep asking me whether we were being tough enough on the major banks. He was particularly interested in a proposal by Paul Volcker to prohibit traditional banks from engaging in “proprietary trading,” from speculating on their own account while enjoying access to cheaper capital as a result of their access to the government safety net. Volcker made the case in multiple meetings that banks shouldn’t be able to behave like hedge funds, taking trading risks that could force the Fed or the FDIC to ride to their rescue if the bets went bad.

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America
by Matt Taibbi
Published 15 Feb 2010

On the very last page of the newsletter, in tiny print, Goldman wrote, under the heading “General Disclosures,” the following: Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions reflected in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy and sell, the securities or derivatives, if any, referred to in this research.

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Miklos starts hearing that the other party is one of the top five investment banks on Wall Street. And the rumor is that the money behind the deals is “partner money”—that the higher-ups in the Wall Street colossus had caught on to this amazing deal and were buying it all up for themselves, with their personal money, via the firm’s proprietary trading desk. “They started tagging AIG with all of this stuff,” he recalls. “And we got squeezed out.” So here’s the question: why would AIG do this? Andy, though not involved with that deal, has a theory. “The question is, were they stupid—or were they just never intending to pay?” he asks. Before we get to the final part of the story—the part that involves a meeting of the very highest officials in government and heads of the most powerful financial companies in the world colluding on one final, unprecedented, grand-scale heist—we have to back up just a little and talk about another continent of Wall Street scams.

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And here at home, bodies like the CFTC and the Treasury will be slowly, agonizingly making supertechnical decisions on regulatory questions like “Who exactly will be subject to the new Consumer Financial Protection Bureau?” and “What kinds of activities will be covered by the partial ban on proprietary trading?” On these real meat-and-potatoes questions about how to set the rules for modern business, most ordinary people won’t have a voice at all; they won’t even be aware that these decisions are being made. But industry lobbyists are already positioning themselves to have a behind-the-scenes impact on the new rules.

The Big Short: Inside the Doomsday Machine
by Michael Lewis
Published 1 Nov 2009

"* Hubler could make hundreds of millions facilitating the idiocy of Morgan Stanley's customers. He could make billions by using the firm's capital to bet against them. Morgan Stanley management, for its part, always feared that Hubler and his small team of traders might quit and create their own hedge fund. To keep them, they offered Hubler a special deal: his own proprietary trading group, with its own grandiose name: GPCG, or the Global Proprietary Credit Group. In his new arrangement, Hubler would keep for himself some of the profits this group generated. "The idea," says a member of the group, "was for us to go from making one billion dollars a year to two billion dollars a year, right away."

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He was smart enough to be cynical about his market but not smart enough to realize how cynical he needed to be. Inside Morgan Stanley, there was apparently never much question whether the company's elite risk takers should be allowed to buy $16 billion in subprime mortgage bonds. Howie Hubler's proprietary trading group was of course required to supply information about its trades to both upper management and risk management, but the information the traders supplied disguised the nature of their risk. The $16 billion in subprime risk Hubler had taken on showed up in Morgan Stanley's risk reports inside a bucket marked "triple A"--which is to say, they might as well have been U.S.

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Amazingly, it had nothing to do with the wisdom of owning $16 billion in complex securities whose value ultimately turned on the ability of a Las Vegas stripper with five investment properties, or a Mexican strawberry picker with a single $750,000 home, to make rapidly rising interest payments. The dispute was over Morgan Stanley's failure to deliver on its promise to spin Hubler's proprietary trading group off into its own money management firm, of which he would own 50 percent. Outraged by Morgan Stanley's foot-dragging, Howie Hubler threatened to quit. To keep him, Morgan Stanley promised to pay him, and his traders, an even bigger chunk of GPCG's profits. In 2006, Hubler had been paid $25 million; in 2007, it was understood, he would make far more.

High-Frequency Trading
by David Easley , Marcos López de Prado and Maureen O'Hara
Published 28 Sep 2013

Gomber et al suggest criteria that only AT fulfil: agent trading; minimising market impact (for large orders); achievement of a particular benchmark; holding periods of possibly days, weeks or months; working an order through time and across markets. Finally, we list criteria that only HFT satisfy: very high number of orders; rapid order cancellation; proprietary trading; profit from buying and selling; no significant positions at the end of day; very short holding periods; very low margins extracted per trade; low latency requirement; use of co-location/proximity services and individual data feeds; a focus on highly liquid instruments. Indeed, as pointed out by Gomber et al (2011), HFT is not a trading strategy as such.

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In contrast to these studies, the following sections provide anecdotal evidence of the behaviour of computerised traders in times of severe stress in foreign exchange markets: • the JPY carry trade collapse in August 2007; • the May 6, 2010, Flash Crash; • JPY appreciation following the Fukushima disaster; • the Bank of Japan intervention in August 2011 and Swiss National Bank intervention in September 2011. 76 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 77 — #97 i i HIGH-FREQUENCY TRADING IN FX MARKETS While each of these episodes is unique in terms of the specific details and they occurred at different stages of the evolution of highfrequency traders, these events provide valuable insight into how computerised traders behave in periods of large price moves. August 2007 yen appreciation The August 16, 2007, USD/JPY price rise was the result of the unwinding large yen carry-trade positions; many hedge funds and banks with proprietary trading desks had large positions at risk and decided to buy back yen to pay back low-interest loans. Chaboud et al (2012) provide details of this event, and report that the event had one of the highest realised volatilities and the highest absolute value of serial correlation in five-second returns.

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Nanex (2010) reported that quote saturation and NYSE Consolidated Quotation System (CQS) delays, combined with negative news from Greece together with the sale of E-mini S&P 500 futures 77 i i i i i i “Easley” — 2013/10/8 — 11:31 — page 78 — #98 i i HIGH-FREQUENCY TRADING “was the beginning of the freak sell-off which became known as the Flash Crash”. Menkveld and Yueshen (2013) analysed the May 6, 2010, Flash Crash using public and proprietary trade data on E-mini S&P 500 futures and S&P 500 Exchange Traded Fund (ETF) and found that the large mutual fund, whose E-mini trading reportedly contributed to the crash, was relatively inactive during the period of the crash, as its net selling volume was only 4% of the total E-mini net sells. Sharp price movement was also witnessed in the FX market.

Money and Power: How Goldman Sachs Came to Rule the World
by William D. Cohan
Published 11 Apr 2011

Not only would having more capital help the firm absorb these outsize trading losses—until they could be stanched—but a group of older Goldman partners were looking to take as much as $150 million of their capital out of the firm and then retire. Then there was Goldman’s evolving business plan, which required more capital to increase Goldman’s principal investments in proprietary trading, private equity, and real estate. Upon hearing Rubin and Friedman’s pitch, the Management Committee—comprising partners nearing the end of their reigns—could see the wisdom of cashing out with an IPO. The consensus on the committee was that the firm should go public sooner rather than later.

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Many members of the committee spoke up in support of the IPO, but everyone paid particular interest when Friedman and Rubin got up together to speak in favor. Weinberg had positioned them, after all, to lead the firm after he retired. They made the case that with even more capital, Goldman could soon be a rival to Salomon Brothers in trading and could also become a leader in proprietary trading (for its own account) as well as in private equity and other forms of principal investing. Then they touched on the issue of partner liability. As a partnership, each of them individually was responsible for absorbing the losses the firm incurred in an amount equal to his entire net worth. This was no small worry, given the recent trading losses and such existential threats as the lawsuits that had hit the firm in the wake of the Penn Central bankruptcy.

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He recalled a moment during Goldman’s 1993 bonanza when one trader went on the internal squawk box and said, “Buy Bunds,” a reference to German federal government bonds. When a broker wanted to know how many Bunds he should be buying, the reply came: “I said buy Bunds. I’ll tell you when to stop.” Another time, Goldman’s chief economist in London, Gavyn Davies, came by the proprietary trading desk to offer his macroeconomic view of the world. One trader cut Davies off and “with his boots up on the desk,” told him, “With all due respect, Gavyn, I do my own research. I was in quite a few bars in Spain last weekend and let me tell you something—they were empty.” He followed this bit of trenchant analysis with another: “I’ve got another rule that I live by: ‘If you can’t drink the water, sell the currency.’ ” Siva-Jothy said he found the Goldman approach “incredibly powerful” and a “wonderful environment in which to work” but also “it was to have its downside as we discovered in 1994.”

All the Devils Are Here
by Bethany McLean
Published 19 Oct 2010

Sometimes it bought or shorted mortgage-related securities because it couldn’t get the deal done without committing its own capital. Other times, it did so because it had its own “view” about which way the securities were headed and it was trading for its own account. In any case, the line between client-related trading and proprietary trading was very blurry: if Goldman hedged a position that was a result of facilitating a client trade, did that count as a client trade or a proprietary trade? Goldman’s chief risk officer, Craig Broderick, would later say that “our client base is extremely aware and clear about what function we are performing.” But contemporaneous e-mails—and complaints after the fact—would paint a messier picture.

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One partner described it as a bit of a “sun god phenomenon.” As Blankfein rose, he pushed hard to complete the transformation that had begun under Rubin and had accelerated under Paulson. What this meant, broadly speaking, was that Goldman no longer sat on the sidelines dispensing advice. The new Goldman was at the center of the action. It had a proprietary trading operation and a large private equity business. It used its money to invest alongside clients, to get trades done—and, sometimes, to compete with clients or trade against them. In the trading business, Goldman wasn’t just hedging its risk, but actively seeking to profit for its own account. In other words, instead of trying to avoid conflicts of interest with clients, Goldman embraced them—and made money from them.

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Hedge fund managers and private equity executives alike complained that while they no longer trusted the firm, they did business with Goldman because they had to—the firm was so dominant and so much better at everything than everyone else that you pretty much had no choice. By 2004, trading accounted for 75 percent of Goldman’s profits, while investment banking had shrunk to about 6 percent. Soon there was a widespread cliché: Goldman was just a giant hedge fund that was engaged in proprietary trading and investing for its own account. Goldman always insisted that it had something no hedge fund had: customers. And that was true. As Goldman’s chief financial officer, David Viniar, explained it on a 2003 call, “There is a small percentage of our trading that is purely proprietary and there is a small percentage that is purely customer driven.

No One Would Listen: A True Financial Thriller
by Harry Markopolos
Published 1 Mar 2010

Similarly, he adds, another firm could duplicate the strategy in an attempt to get similar results, but its returns would likely be unmatched because “you need the physical plant and a large operation” to do it with equal success. However, many Wall Street firms, he says, do use the strategy in their proprietary trading activities, but they don’t devote more capital to such operations because their return on capital is better used in other operations. Setting up a proprietary trading operation strictly for the strategy, or a separate asset management division in order to collect the incentive fees, says Madoff, would conflict with his firm’s primary business of market making. Commissions Suffice “We’re perfectly happy making the commissions” by trading for the funds, he says, which industry observers note also gives the firm the entirely legitimate opportunity to “piggyback” with proprietary trading that is given an advantage by knowing when and where orders are being placed.

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Even though I was busy with a dozen active cases, I dropped everything and started writing just a few thoughts. And then a few more. Eventually I had three pages of questions, more than 80 of them, although, as I wrote, “Gee, I could write questions all night. Somehow I think they’re not going to answer many of these questions in great detail in order to protect their proprietary trading methodology.” The questions covered all of the red flags we’d been waving for so long: If two stocks with a total portfolio weight of 4 percent drop 50 percent due to company-specific risk (say subprime exposure), how are you protected against a 2 percent portfolio loss? What are your total assets under management?

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Commissions Suffice “We’re perfectly happy making the commissions” by trading for the funds, he says, which industry observers note also gives the firm the entirely legitimate opportunity to “piggyback” with proprietary trading that is given an advantage by knowing when and where orders are being placed. Setting up a division to offer funds directly, says Madoff, is not an attractive proposition simply because he and the firm have no desire to get involved in the administration and marketing required for the effort, nor to deal with investors. Many parts of the firm’s operations could be similarly leveraged, he notes, but the firm generally believes in concentrating on its core strengths and not overextending itself.

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies
by Jeremy Siegel
Published 7 Jan 2014

Such a provision was not in the original bill submitted to Congress but inserted later. Originally the Volcker proposal specifically prohibited a bank or an institution that owns a bank from engaging in proprietary trading that is not at the behest of its clients and from owning or investing in a hedge fund or private equity fund. However, this proposal was later modified to allow up to 3 percent of the capital of banks to go into proprietary trading and exempts hedging operations as well as trading in U.S. Treasury debt. The Volker rule was designed to restore the separation between investment banks and commercial banks that was first mandated by the Glass-Steagall Act of 1933 but was effectively repealed by Congress in 1999 in the Gramm-Leach-Bliley Act.

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The act’s powers range from establishing the fees for debit cards, to setting the regulations of hedge funds, restricting “predatory lending,” addressing compensation of CEOs and other employees, and formulating measures designed to stabilize the economy and financial system. The act comprises 16 titles and requires that regulators create 243 rules, conduct 67 studies, and issue 22 periodic reports.25 The three most important parts of the law that impact the overall economy are (1) the “Volcker rule,” which limits the proprietary trading of commercial banks, (2) Title II, which provides for the liquidation of large financial firms not under the purview of the Federal Deposit Insurance Corporation, and (3) Title XI, which adds responsibilities but also places new restrictions on the Federal Reserve. The Volcker rule was named after Paul Volcker, former chairman of the Federal Reserve and chair of President Obama’s President’s Economic Recovery Advisory Board, who argued that financial stability required that Congress sharply limit the ability of banks to trade for their own accounts.

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Nor would it have applied to the insurance giant AIG, which the Fed chose to save after seeing the turmoil unleashed by the Lehman bankruptcy. Furthermore, banks that obtained loans from the Fed, specifically Citibank and Bank of America, ran into trouble because of bad real estate loans, not proprietary trading. Given this history, it is dubious that the Volcker amendment, had it been in effect in 2007, would have changed the course of the financial crisis. Title II of the Dodd-Frank Act permits the government to dismantle expeditiously financial firms that become a threat to the stability of the financial system in order to minimize the risk of a financial crisis.

Keeping at It: The Quest for Sound Money and Good Government
by Paul Volcker and Christine Harper
Published 30 Oct 2018

Stephen Thieke, our hard-working project director with both high-level central banking and commercial bank risk-management expertise, succeeded in getting the report published in January 2009, early enough so that it had some influence in shaping financial reform after the crisis. The report’s recommendations included consolidating supervision and regulation of the largest, most complex financial institutions under a single regulator, strong capital standards and risk controls (including on proprietary trading by institutions benefiting from the protection of deposit insurance and access to Federal Reserve financing), and emphasis on the effective oversight of all financial markets. I carried the message into discussions with the new Obama administration, as I will describe in a later chapter. In taking a public position in these and other areas, the G-30, like other self-appointed expert groups, needs to take care that these reports do not lose truly independent stature, free of pleading for the particular interests of its members.

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All too likely, it will be set aside until the next crisis again fully exposes the weaknesses.* Another controversial and well-publicized rule amid the complexities of Dodd-Frank bears my name. It aims to ameliorate some of the conflicts of interest and inappropriate incentives inherent in proprietary trading and the ownership and management of private equity and hedge funds by commercial banks. The mind-bending complexities of the new financial technology combined with the modern practice of incentive payments that reward employees for particular deals practically invites malpractice, whatever the pious institutional statements about the priority placed on client relationships and an ethical culture.

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My view, widely shared, is that it is inappropriate for an institution that benefits from the federal “safety net” (for example, access to Federal Reserve liquidity, FDIC insurance, and less tangible comforts) to engage in risk taking unrelated to the essential banking functions of deposit taking, lending, and serving customers while sharing in operating a safe, efficient, and necessary payments system. For months, my proposal that proprietary trading be banned from commercial banks seemed to attract little attention inside or outside of the Obama administration. In the absence of administration backing, Tony Dowd spent the summer and fall meeting with members of Congress and their staffs, winning some support on the Senate Banking Committee.

Statistical Arbitrage: Algorithmic Trading Insights and Techniques
by Andrew Pole
Published 14 Sep 2007

That is difficult and, hence, there is much uncertainty, confusion, and an unavoidable scramble to the conservative ‘‘Statistical arbitrage is dead.’’ How is the Resurrection viewed, I wonder? The competition argument deserves serious attention. Though there are no publicly available figures recording the amount of capital devoted by hedge funds and proprietary trading desks of investment banks to systematic equity trading strategies, it can be deduced from the remarks of clearing brokers; investors; listings in Barron’s, Altvest, and so forth that both the number of funds and the amount of money devoted to the discipline increased greatly before 2000. An immediate counter to this observation as evidence supporting the competition hypothesis is that the increase in assets and number of managers has been taking place for two decades yet only with performance drought is a link to asset-class performance being made.

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—Virgil 10.1 INTRODUCTION invented the pairs trading business two decades ago, H aving Morgan Stanley was at the forefront of the creation of a new business in the early 2000s; a less risky, more sustainable business, which, in a wonderful example of commercial parricide, has systematically destroyed opportunities for old-line pairs trading. Algorithmic trading was born. Huge order flow from institutions and hedge funds, much of which is electronically matched in house, provided multiple opportunities for bounty beyond the expected brokerage fees. Combining the insight and knowledge learned from proprietary trading (beginning with the classic pairs trading business) with analysis of a warehouse of order flow data, Morgan Stanley and other brokers built trading tools that incorporate models for forecasting market impact as a function of order size and time of day, moderated by specific daily trading volume stock by stock.

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With the ability to gauge how much a client would be willing to pay for a fill, and estimates of how long it would take to get the trade at much lower market impact, the many possibilities fairly screamed themselves to researchers, echoing and amplifying the old-line pairs trade screams heard by a previous generation two decades earlier. Arise Black Boxes 185 All of this opportunity offered itself for reaping without requirement of capital commitment. The risk of proprietary trading was eliminated and the ‘‘new’’ business became infinitely scalable. Morgan Stanley has competitors, of course. Algorithmic trading tools have been developed and marketed by Goldman Sachs, Credit Suisse First Boston, Lehman Brothers, Bank of America, and others. 10.2 MODELING EXPECTED TRANSACTION VOLUME AND MARKET IMPACT The place to begin is the data mine.

The Payoff
by Jeff Connaughton

Volcker began, “You know, just about whatever anyone proposes, no matter what it is, the banks will come out and claim that it will restrict credit and harm the economy . . .” He took a long pause while Ted and I leaned in closer to hear what he’d say next. “It’s all bullshit.” Ted and I laughed. We were relieved . . . and emboldened. Volcker outlined his idea for banning banks from engaging in high-risk proprietary trading. After 1999, when Congress repealed Glass-Steagall (the 1933 Depression-era law that separated commercial banks with their federally insured deposits from investment houses), banks with federally insured deposits had started trading for their own accounts, using excessive leverage and making risky bets, implicitly relying on a federal safety net to catch them if they failed.

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I wanted it to read like a long-form essay, because I knew few people would hear it when Ted delivered it to an empty Senate chamber (unless casting a vote, senators are rarely on the Senate floor, usually leaving any speaker to talk solely to the presiding officer and C-SPAN cameras). Finally, Ted and I were comfortable with our magnum opus. And so on March 11, 2010, just a day after he signed onto the Merkley-Levin bill to restrict proprietary trading, Ted delivered his longest speech yet: “Wall Street Reform that Will Prevent the Next Financial Crisis.” It weighed in at 3,391 words (and that’s the shorter version Ted read on the floor; the longer version, at 6,572 words, was placed into the Congressional Record). It was, as Simon put it that morning in a HuffPo “splash” above Ted’s picture, which filled my computer screen, “The Speech for Which We Have All Been Waiting.”

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Bank of America made a huge miscalculation both in buying Countrywide and in acquiring Merrill Lynch (two very different kinds of transactions); and, like Citigroup, it would’ve failed without TARP and direct assistance from the Fed. Glass-Steagall is the inspiration for the Volcker Rule (on proprietary trading), Ted said, and President Obama and presumably the Treasury Department support the Volcker Rule. A cap on non-deposit liabilities, Ted argued, might be a simpler and better approach than the Volcker Rule, which could quickly get complicated. After Geithner left, Ted and I chewed it over further.

Day One Trader: A Liffe Story
by John Sussex
Published 16 Aug 2009

Trading was the only job these dealers knew how to do, despite being illequipped to succeed in the new electronic age. Another £ 10,000 would be deposited with a broker to set up an account, only for the money to vanish a few months later. Some locals would keep coming back to have another go at trading until a savings pot was emptied and they were forced to look for work elsewhere or find a proprietary trading and clearing firm which would sponsor them to trade. These firms would be able to claw the money back from a sponsored trader through fees and commission charges. Some of the ex-Liffe dealers that did become successful day traders are still plying their trade in the City, renting desks at independent dealing firms known as trading arcades.

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Floor brokers at major investment banks who had enjoyed annual salaries of £ 100,000 made the mistake of starting new lives as day traders when the pits closed. A £ 40,000 redundancy payment would be used to set up a trading account at a brokerage firm. These day traders had a good understanding of the fundamentals of the market. Floor brokers would speak at length with dealers from investment funds and bank proprietary trading desks about the ebb and flow of the markets. This gave them an intimate knowledge of the behaviour of various financial instruments and the impact of economic and geopolitical events on dealing at major exchanges. But these dealers were still novices when it came to trading with their own money.

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A top trader at a US investment bank who retired as a multi-millionaire at the age of 37 opened a £ 50,000 trading account with a brokerage firm. He made just £ 3,000 in six months. While he would think nothing of buying 1,000 lots of futures contracts in his previous incarnation at the US investment bank’s proprietary trading desk even he found himself unable to pull the trigger. This was what separated bank traders from the best locals who would be unflinching in their conviction of where the market was heading and risk large sums of their own money to back up their belief. The ex-Liffe workers that failed as professional traders often ended up looking for work outside the industry.

Investment: A History
by Norton Reamer and Jesse Downing
Published 19 Feb 2016

It is not that speculation should be banned in the financial markets more generally, of course, but that the speculation should be the domain of individuals, hedge funds, private equity firms, and other investors that can experience losses without inducing the seizure of the credit markets. The rule’s implementation took two years to clarify in the face of stark opposition. After all, proprietary trading is generally a profitable business for many investment banks. It is profitable, of course, until it is not. The original idea of the rule was threatened for some time, and Paul Volcker himself has stated, “I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance.” The final version, by contrast, was some 900 pages.49 222 Investment: A History The difficulty in designing the optimal legislation for financial regulation is that crisis is what prompts the appetite for change.

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Simon Johnson, former chief economist at the IMF, makes the point that the experience of many banks in the crisis was, in fact, an issue of solvency but that many hoped that asset prices would rise again to reverse the issue.47 As such, regulators will be forced to think through the question of solvency based on liquidation value as well as potentially transitory insolvency for banks that have slightly negative equity but have a chance of becoming positive in an improved fiscal environment. One of the most promising ways of providing more stability to the banking system was the Volcker Rule, named after Paul Volcker, a previous chairman of the Federal Reserve. The goal of the original rule was to minimize or eliminate proprietary trading, or the trading of financial instruments with the firm’s own capital.48 It is a sound proposal, given that banking, in its most successful form, should be a rather mundane business. It should involve simple maturity transformation from short-dated depositors to longer-dated borrowers with sound asset coverage, the establishment of the appropriate collateral and covenants, and a close monitoring of borrower creditworthiness.

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This human frailty does not seem to have changed, and the tendency for the system to become more permissive over periods of prosperity has not changed either. This proclivity shows in both legislation and regulation, with rules often pared back as the boom is underway. Given both of these facts, the Dodd-Frank Act may be progress, but more could have been done to limit proprietary trading, enhance the accountability of top corporate officers, and design even tighter oversight controls. After all, we may not have another chance until the depths of the next crisis. And indeed, in the end only time will tell how successful this legislation is in enhancing the stability of the system.

Nerds on Wall Street: Math, Machines and Wired Markets
by David J. Leinweber
Published 31 Dec 2008

The Defense Advanced Research Projects Agency (DARPA) paid for the development of the Internet, which was called the ARPANET in the early days. Many additional millions have gone into programs with names like “Machine Understanding and Classification” and “Text Retrieval and Categorization.” A great deal of this research has now found its way into tools and products for mining the deep Web. Advanced proprietary trading firms have added these techniques to the sophisticated quantitative analytics in their technological arsenals. 1.1 1.2 1.4 1.5 1.7 1.8 2.0 2.3 2.6 33.0 Average Board Member Concentration as of April 2003 Figure 2.15 Cumulative Abnormal Return (CAR) Over 2002. Board member concentration deciles and return relative to S&P 1500 index, 2002.

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Under the 2-and-20 plan the firm would get to keep 20 percent of that, another $5 million on top of the $2 million in asset-based fees. The client keeps $18 million, substantially more than the meager few percent the client would have gotten in Treasuries. A $100 million portfolio is small as hedge funds go. It costs money to do the research or proprietary trading to produce that 25 percent alpha, so by the time all the bills are paid, that $7 million the manager takes is seriously pared down. But when the fund gets larger, the economies of scale kick in in a major way. Investment strategies don’t scale to the sky, but it is (approximately) true that the cost to run a $1 billion portfolio is not that much more than for $100 million.

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Traders can watch the same portfolio in any number of ways, watch multiple portfolios in the same way, or run completely unrelated strategies simultaneously. This paradigm has proven to be a good fit for a wide set of real investment and trading applications. It is used for market surveillance, market making, options trading, equity transaction cost control, and proprietary trading. Integration with Real-Time Feeds and Historical Databases Trading analytics often involve many measurements made over many days. An example is a measurement of past volatility over 100 trading days as an input to an option valuation function. Without access to historical data, filling up this analytic would take 100 days, which is clearly unacceptable.

Automate This: How Algorithms Came to Rule Our World
by Christopher Steiner
Published 29 Aug 2012

Spivey and Barksdale had them drilling, digging, and dredging through all manner of terrain and materials: mountain schist, valley shale, earthy mud, and Pennsylvania granite. Exasperated with the pace, Spivey and Barksdale kept an ear to the ground for rivals who could usurp them. They feared that one of the large proprietary trading houses would find out about their dig and pull the trick off first. Even though the project’s scope was huge, expensive, and almost unfathomable for a trading firm, players like Chicago’s Getco had the cash and would gladly have paid to gain the advantage. Spread’s fears diminished as their crews became better in difficult terrain and the project’s velocity increased without a competitor emerging.

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Conway had run right up against the Wall Street quant machine. 8 WALL STREET VERSUS SILICON VALLEY A COLLECTION OF EVENTS, ALL coalescing right around 2001, led to the fattening of trading houses’ income statements and the pools of adroit programmers they kept on staff. The expansion of the financial sector beginning in this period was unprecedented and fueled by two things: the booming housing sector (which Wall Street helped create) and the rise of algorithmic proprietary trading. In 2000, bots accounted for less than 10 percent of all trading on U.S. stock markets. Big Wall Street players knew well of their existence, but the algorithms back then weren’t moving the market. The thought of them co-opting the entire works and sparking an event like that of the Flash Crash was inconceivable.

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Simpson jurors evaluated, 177 see also litigation Lawrence, Peter, 1–2 least squares method, 62–63 Le Corbusier, 56 Lee, Spike, 87 Lehman Brothers, 191, 192 Leibniz, Gottfried, 26, 57–61, 68, 72 binary language of, 57–58, 60–61, 71, 73 Leipzig, 58 Lennon, John, 104, 107–8 “In My Life” claimed by, 110–11 as math savant, 103 “Let It Be,” 103 Levchin, Max, 188 leverage, trading on margin with, 51 Lewis, Michael, 141, 202 Li, David X., 65 Liber Abaci (The Book of Calculation) (Fibonacci), 56–57 Library of Congress, 193 Lin, Jeremy, 142–43 linguistics, 187 liquidity crisis, potential, 51–52 Lisp, 12, 93, 94 lit fiber, 114, 120 lithium hydroxide, 166 Lithuania, 69 litigation: health insurers and, 181 stock prices and potential, 27 Walgreens and, 156 logic: algorithms and, 71 broken down into mechanical operations, 58–59 logic theory, 73 logic trees, 171 London, 59, 66–67, 68, 121, 198 Los Angeles International Airport, security algorithm at, 135 Los Angeles Lakers, 143 loudness, 93, 106 Lovelace, Ada, 73 Lovell, James, 165–67 Lulea, Sweden, 204 lunar module, 166 lung cancer, 154 McAfee, Andrew P., 217–18 McCartney, Paul, 104, 105, 107 “In My Life” claimed by, 110–11 as math savant, 103 McCready, Mike, 78–83, 85–89 McGuire, Terry, 145, 168–72, 174–76 machine-learning algorithms, 79, 100 Magnetar Capital, 3–4, 10 Mahler, Gustav, 98 Major Market Index, 40, 41 Making of a Fly, The (Lawrence), prices of, 1–2 Malyshev, Mikhail, 190 management consultants, 189 margin, trading with, 51 market cap, price swings and, 49 market makers: bids and offers by, 35–36 Peterffy as, 31, 35–36, 38, 51 market risk, 66 Maroon 5, 85 Marseille, 147, 149 Marshall, Andrew, 140 Martin, George, 108–10 Martin, Max (Martin Sandberg), 88–89 math: behind algorithms, 6, 53 education in, 218–20 mathematicians: algorithms and, 6, 71 online, 53 on Wall Street, 13, 23, 24, 27, 71, 179, 185, 201–3 Mattingly, Ken, 167 MBAs: eLoyalty’s experience with, 187 Peterffy’s refusal to hire, 47 MDCT scans, 154 measurement errors, distribution of, 63 medical algorithms, 54, 146 in diagnosis and testing, 151–56, 216 in organ sharing, 147–51 patient data and home monitoring in, 158–59 physicians’ practice and, 156–62 medical residencies, game theory and matching for, 147 medicine, evidence-based, 156 Mehta, Puneet, 200, 201 melodies, 82, 87, 93 Mercer, Robert, 178–80 Merrill Lynch, 191, 192, 200 Messiah, 68 metal: trading of, 27 volatility of, 22 MGM, 135 Miami University, 91 Michigan, 201 Michigan, University of, 136 Microsoft, 67, 124, 209 microwaves, 124 Midas (algorithm), 134 Miller, Andre, 143 mind-reading bots, 178, 181–83 Minneapolis, Minn., 192–93 minor-league statistics, baseball, 141 MIT, 24, 73, 128, 160, 179, 188, 217 Mocatta & Goldsmid, 20 Mocatta Group, 20, 21–25, 31 model building, predictive, 63 modifiers, 71 Boolean, 72–73 Mojo magazine, 110 Moneyball (Lewis), 141 money markets, 214 money streams, present value of future, 57 Montalenti, Andrew, 200–201 Morgan Stanley, 116, 128, 186, 191, 200–201, 204 mortgage-backed securities, 203 mortgages, 57 defaults on, 65 quantitative, 202 subprime, 65, 202, 216 Mosaic, 116 movies, algorithms and, 75–76 Mozart, Wolfgang Amadeus, 77, 89, 90, 91, 96 MP3 sharing, 83 M Resort Spa, sports betting at, 133–35 Mubarak, Hosni, 140 Muller, Peter, 128 music, 214 algorithms in creation of, 76–77, 89–103 decoding Beatles’, 70, 103–11 disruptors in, 102–3 homogenization or variety in, 88–89 outliers in, 102 predictive algorithms for success of, 77–89 Music X-Ray, 86–87 Musikalisches Würfelspiel, 91 mutual funds, 50 MyCityWay, 200 Najarian, John A., 119 Naples, 121 Napoleon I, emperor of France, 121 Napster, 81 Narrative Science, 218 NASA: Houston mission control of, 166, 175 predictive science at, 61, 164, 165–72, 174–77, 180, 194 Nasdaq, 177 algorithm dominance of, 49 Peterffy and, 11–17, 32, 42, 47–48, 185 terminals of, 14–17, 42 trading method at, 14 National Heart, Lung, and Blood Institute, 159 Nationsbank, Chicago Research and Trading Group bought by, 46 NBA, 142–43 Neanderthals, human crossbreeding with, 161 Nebraska, 79–80, 85 Netflix, 112, 207 Netherlands, 121 Netscape, 116, 188 Nevermind, 102 New England Patriots, 134 New Jersey, 115, 116 Newsweek, 126 Newton, Isaac, 57, 58, 59, 64, 65 New York, N.Y., 122, 130, 192, 201–2, 206 communication between markets in Chicago and, 42, 113–18, 123–24 financial markets in, 20, 198 high school matching algorithm in, 147–48 McCready’s move to, 85 Mocatta’s headquarters in, 26 Peterffy’s arrival in, 19 tech startups in, 210 New York Commodities Exchange (NYCE), 26 New Yorker, 156 New York Giants, 134 New York Knicks, 143 New York magazine, 34 New York State, health department of, 160 New York Stock Exchange (NYSE), 3, 38–40, 44–45, 49, 83, 123, 184–85 New York Times, 123, 158 New York University, 37, 132, 136, 201, 202 New Zealand, 77, 100, 191 Nietzsche, Friedrich, 69 Nirvana, 102 Nixon, Richard M., 140, 165 Nobel Prize, 23, 106 North Carolina, 48, 204 Northwestern University, 145, 186 Kellogg School of Management at, 10 Novak, Ben, 77–79, 83, 85, 86 NSA, 137 NuclearPhynance, 124 nuclear power, 139 nuclear weapons, in Iran, 137, 138–39 number theory, 65 numerals: Arabic-Indian, 56 Roman, 56 NYSE composite index, 40, 41 Oakland Athletics, 141 Obama, Barack, 46, 218–19 Occupy Wall Street, 210 O’Connor & Associates, 40, 46 OEX, see S&P 100 index Ohio, 91 oil prices, 54 OkCupid, 144–45 Olivetti home computers, 27 opera, 92, 93, 95 Operation Match, 144 opinions-driven people, 173, 174, 175 OptionMonster, 119 option prices, probability and statistics in, 27 options: Black-Scholes formula and, 23 call, 21–22 commodities, 22 definition of, 21 pricing of, 22 put, 22 options contracts, 30 options trading, 36 algorithms in, 22–23, 24, 114–15 Oregon, University of, 96–97 organ donor networks: algorithms in, 149–51, 152, 214 game theory in, 147–49 oscilloscopes, 32 Outkast, 102 outliers, 63 musical, 102 outputs, algorithmic, 54 Pacific Exchange, 40 Page, Larry, 213 PageRank, 213–14 pairs matching, 148–51 pairs trading, 31 Pakistan, 191 Pandora, 6–7, 83 Papanikolaou, Georgios, 153 Pap tests, 152, 153–54 Parham, Peter, 161 Paris, 56, 59, 121 Paris Stock Exchange, 122 Parse.ly, 201 partial differential equations, 23 Pascal, Blaise, 59, 66–67 pathologists, 153 patient data, real-time, 158–59 patterns, in music, 89, 93, 96 Patterson, Nick, 160–61 PayPal, 188 PCs, Quotron data for, 33, 37, 39 pecking orders, social, 212–14 Pennsylvania, 115, 116 Pennsylvania, University of, 49 pension funds, 202 Pentagon, 168 Perfectmatch.com, 144 Perry, Katy, 89 Persia, 54 Peru, 91 Peterffy, Thomas: ambitions of, 27 on AMEX, 28–38 automated trading by, 41–42, 47–48, 113, 116 background and early career of, 18–20 Correlator algorithm of, 42–45 early handheld computers developed by, 36–39, 41, 44–45 earnings of, 17, 37, 46, 48, 51 fear that algorithms have gone too far by, 51 hackers hired by, 24–27 independence retained by, 46–47 on index funds, 41–46 at Interactive Brokers, 47–48 as market maker, 31, 35–36, 38, 51 at Mocatta, 20–28, 31 Nasdaq and, 11–18, 32, 42, 47–48, 185 new technology innovated by, 15–16 options trading algorithm of, 22–23, 24 as outsider, 31–32 profit guidelines of, 29 as programmer, 12, 15–16, 17, 20–21, 26–27, 38, 48, 62 Quotron hack of, 32–35 stock options algorithm as goal of, 27 Timber Hill trading operation of, see Timber Hill traders eliminated by, 12–18 trading floor methods of, 28–34 trading instincts of, 18, 26 World Trade Center offices of, 11, 39, 42, 43, 44 Petty, Tom, 84 pharmaceutical companies, 146, 155, 186 pharmacists, automation and, 154–56 Philips, 159 philosophy, Leibniz on, 57 phone lines: cross-country, 41 dedicated, 39, 42 phones, cell, 124–25 phosphate levels, 162 Physicians’ Desk Reference (PDR), 146 physicists, 62, 157 algorithms and, 6 on Wall Street, 14, 37, 119, 185, 190, 207 pianos, 108–9 Pincus, Mark, 206 Pisa, 56 pitch, 82, 93, 106 Pittsburgh International Airport, security algorithm at, 136 Pittsburgh Pirates, 141 Pius II, Pope, 69 Plimpton, George, 141–42 pneumonia, 158 poetry, composed by algorithm, 100–101 poker, 127–28 algorithms for, 129–35, 147, 150 Poland, 69, 91 Polyphonic HMI, 77–79, 82–83, 85 predictive algorithms, 54, 61, 62–65 prescriptions, mistakes with, 151, 155–56 present value, of future money streams, 57 pressure, thriving under, 169–70 prime numbers, general distribution pattern of, 65 probability theory, 66–68 in option prices, 27 problem solving, cooperative, 145 Procter & Gamble, 3 programmers: Cope as, 92–93 at eLoyalty, 182–83 Peterffy as, 12, 15–16, 17, 20–21, 26–27, 38, 48, 62 on Wall Street, 13, 14, 24, 46, 47, 53, 188, 191, 203, 207 programming, 188 education for, 218–20 learning, 9–10 simple algorithms in, 54 Progress Energy, 48 Project TACT (Technical Automated Compatibility Testing), 144 proprietary code, 190 proprietary trading, algorithmic, 184 Prussia, 69, 121 PSE, 40 pseudocholinesterase deficiency, 160 psychiatry, 163, 171 psychology, 178 Pu, Yihao, 190 Pulitzer Prize, 97 Purdue University, 170, 172 put options, 22, 43–45 Pythagorean algorithm, 64 quadratic equations, 63, 65 quants (quantitative analysts), 6, 46, 124, 133, 198, 200, 202–3, 204, 205 Leibniz as, 60 Wall Street’s monopoly on, 183, 190, 191, 192 Queen’s College, 72 quizzes, and OkCupid’s algorithms, 145 Quotron machine, 32–35, 37 Rachmaninoff, Sergei, 91, 96 Radiohead, 86 radiologists, 154 radio transmitters, in trading, 39, 41 railroad rights-of-way, 115–17 reactions-based people, 173–74, 195 ReadyForZero, 207 real estate, 192 on Redfin, 207 recruitment, of math and engineering students, 24 Redfin, 192, 206–7, 210 reflections-driven people, 173, 174, 182 refraction, indexes of, 15 regression analysis, 62 Relativity Technologies, 189 Renaissance Technologies, 160, 179–80, 207–8 Medallion Fund of, 207–8 retirement, 50, 214 Reuter, Paul Julius, 122 Rhode Island hold ‘em poker, 131 rhythms, 82, 86, 87, 89 Richmond, Va., 95 Richmond Times-Dispatch, 95 rickets, 162 ride sharing, algorithm for, 130 riffs, 86 Riker, William H., 136 Ritchie, Joe, 40, 46 Rochester, N.Y., 154 Rolling Stones, 86 Rondo, Rajon, 143 Ross, Robert, 143–44 Roth, Al, 147–49 Rothschild, Nathan, 121–22 Royal Society, London, 59 RSB40, 143 runners, 39, 122 Russia, 69, 193 intelligence of, 136 Russian debt default of 1998, 64 Rutgers University, 144 Ryan, Lee, 79 Saint Petersburg Academy of Sciences, 69 Sam Goody, 83 Sandberg, Martin (Max Martin), 88–89 Sandholm, Tuomas: organ donor matching algorithm of, 147–51 poker algorithm of, 128–33, 147, 150 S&P 100 index, 40–41 S&P 500 index, 40–41, 51, 114–15, 218 Santa Cruz, Calif., 90, 95, 99 satellites, 60 Savage Beast, 83 Saverin, Eduardo, 199 Scholes, Myron, 23, 62, 105–6 schools, matching algorithm for, 147–48 Schubert, Franz, 98 Schwartz, Pepper, 144 science, education in, 139–40, 218–20 scientists, on Wall Street, 46, 186 Scott, Riley, 9 scripts, algorithms for writing, 76 Seattle, Wash., 192, 207 securities, 113, 114–15 mortgage-backed, 203 options on, 21 Securities and Exchange Commission (SEC), 185 semiconductors, 60, 186 sentence structure, 62 Sequoia Capital, 158 Seven Bridges of Königsberg, 69, 111 Shannon, Claude, 73–74 Shuruppak, 55 Silicon Valley, 53, 81, 90, 116, 188, 189, 215 hackers in, 8 resurgence of, 198–211, 216 Y Combinator program in, 9, 207 silver, 27 Simons, James, 179–80, 208, 219 Simpson, O.

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
by Maneet Ahuja , Myron Scholes and Mohamed El-Erian
Published 29 May 2012

He realized that financial institutions, in earning their way out of the mess they were in, would have to look forward to the future cash-generating ability of the institutions—thus cleaning up their balance sheets by getting rid of toxic assets and drastically slashing the size of risky businesses, like proprietary trading arms, essentially internal “hedge funds,” and credit restructuring divisions. A lifetime of recognizing patterns also paid off as Loeb realized that the much-discussed Citi trade at the end of February represented a kind of “blueprint” for the banks to solve their capital inadequacies with implicit Treasury permission.

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Though he wasn’t exactly shot at during the financial crisis of 2008, he was at the vortex of the conflict. Then 35 years old and the youngest managing director in the history of Deutsche Bank, Weinstein helped manage the bank’s affairs at that perilous time, when banks were suffering significant losses. Weinstein was also running a proprietary trading group within Deutsche called Saba, which itself was hit with losses of $1.8 billion, or 18 percent, on capital of $10 billion, a sudden turn of events after 10 profitable years. Moreover, Weinstein had long championed credit default swaps (CDSs), the still poorly understood instruments that were widely blamed for accelerating the collapse.

…

Highly reluctant to lose Weinstein, they gave him wider authority and responsibility within the bank. By 2006, Weinstein was running junk bonds, corporate bonds, convertible bonds, and credit derivatives globally. At the same time, Deutsche encouraged his entrepreneurial ambitions within the bank structure, and in a significant concession, allowed him to brand his proprietary trading group, to facilitate an eventual lift-out from the bank. And why not? Weinstein’s earnings were certainly extraordinary. In 2006 the proprietary unit alone was managing $3 billion and earned $900 million for the bank. The following year, it managed $5 billion, and earned $600 million for the bank.

Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits
by Kevin Roose
Published 18 Feb 2014

A group called Goldman Sachs Principal Strategies had popped up to focus on proprietary trading, but there had been others, including prop-focused commodities and mortgage traders, and an elite team of investors known throughout the bank as SSG—the Special Situations Group. Jeremy had heard these groups spoken of in reverent tones, but he had also heard that they were on the way out of vogue. The Volcker Rule (named after former Federal Reserve chairman Paul Volcker), a much-heralded piece of the Dodd-Frank financial reform act that cracked down on proprietary trading, was moving toward implementation, and the days of glory for prop desks all across Wall Street seemed numbered.

…

Banks were still taking on huge, leveraged positions in opaque and little-regulated markets. The junk bond market, which deals in high-yield corporate debt that is often issued by volatile and risky companies, was having its strongest year since the crisis. And although the Dodd-Frank act had effectively shut down the most obvious forms of proprietary trading at Wall Street firms, that work lived on under the guise of “market-making” trading desks, which were often functionally similar to their predecessors. Three years after Lehman Brothers, it was still far better to be the guy pushing the button on a billion-dollar trade than the guy hovering just behind him, warning about what could go wrong.

Trading at the Speed of Light: How Ultrafast Algorithms Are Transforming Financial Markets
by Donald MacKenzie
Published 24 May 2021

The practice emerged before the name did; as far as I can tell, the term first came into use at the Chicago hedge fund Citadel in the early 2000s. HFT is “proprietary” automated trading that takes place at speeds far faster than an unaided human can trade and in which trading’s profitability is inherently dependent on its speed.4 (The goal of proprietary trading is direct trading profit, rather than, for example, earning fees by executing trades on behalf of others.) Although the human beings employed by HFT firms to design and supervise trading algorithms often refer to themselves as traders, the trading itself is actually done by those computer algorithms.

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Banks are still engaged in market-making in some classes of financial instrument (such as those discussed in chapter 4: foreign exchange and governments’ sovereign bonds), albeit often using systems that are slow by HFT standards, but large-scale use of other HFT strategies by banks was effectively ended by the curbs on banks’ proprietary trading that followed the 2008 banking crisis. The HFT firms I have visited differ widely. Some had offices in unremarkable or even scruffy buildings; others had spectacular views over Lake Michigan, Manhattan, or Greater London. The décor is generally bland, although as I sat waiting for an interviewee in one HFT firm’s new offices, some of the owner’s art collection was ready to be hung.

…

He praised “market-makers formerly known as prop[rietary] traders or high-frequency traders,” arguing that “trading on a trading venue is only possible because of market-makers,” and launching a thinly veiled attack on his French counterparts, who, coming from a country whose big banks are still active in trading but which does not have HFT firms like those in the Netherlands, were seeking to impose bank-style capital requirements on proprietary trading firms. Just the previous day, however, I had sat in a café with an experienced Amsterdam trader, interviewee CS, who had told me how arbitrage (which involves exploiting fleeting price discrepancies by buying and selling as close as possible to simultaneously, and thus typically involves “taking”) was interwoven with market-making, both in what he individually did and in the wider trading of the city’s HFT firms.

Unknown Market Wizards: The Best Traders You've Never Heard Of
by Jack D. Schwager
Published 2 Nov 2020

What did you do then? At that point, I thought I might as well try to apply for as many trading positions as I could anyway. I felt if I could just get an interview, then maybe I could sell myself. I applied to about 30 different places, mostly banks, but also proprietary trading firms. I was rejected by all of them except for one proprietary trading firm that gave me an interview. Tell me about that interview. I was interviewed by the risk manager who had been a floor trader before he decided to switch from trading to management. I had just finished my final exams, and it was the only interview I had.

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I bet 10%–15% of my account on long Swiss franc and Deutsche mark positions, and it turned into a giant profit instead of killing me. I can’t take credit for any of that. None of that is due to my own intelligence or abilities. None of that is due to who I am. That’s cosmic sovereignty. How did you get to manage money for Commodities Corporation? [Commodities Corporation was a proprietary trading firm in Princeton, New Jersey. The firm gained legendary status because some of the traders it seeded would go on to become among the world’s best traders, probably first and foremost being Michael Marcus and Bruce Kovner who were featured in the original Market Wizards book.4] I don’t recall how it started, but they reached out to me.

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I appreciate the platform more than any other client. Do you get paid for being a consultant? I get a free subscription to TickerTags, which is a very expensive platform. The subscriptions are only available to hedge funds and banks. Aren’t you concerned that having this tool available to hedge funds and proprietary trading operations will compromise its effectiveness? No, because I think it will be a very long time before hedge funds are going to have the confidence in this tool that I have. In fact, while we were developing TickerTags, I would often share my trade ideas with hedge funds. Did you share the ideas after you put on the trades?

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle
by Diana B. Henriques
Published 1 Aug 2011

The “investment earnings” credited to their accounts might actually just be “compensation for the use of their money,” he suggested in a note to Ivy’s founders in May 1997. In short, Madoff might be lying about how he was making money for his investors—paying them a share of his firm’s legitimate proprietary trading profits, rather than investing in his arcane hedged strategy—but at least he was actually making money for them, the Ivy executive evidently surmised. This thesis—that Madoff’s investors were actually lenders who were unwittingly financing his own trading activity and getting paid for it with some of his firm’s profits—gained substance two years later when the Ivy executive talked with a prominent hedge fund manager, who was not identified in court records.

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But the price of that bailout was that the border between Madoff’s fraud and his legitimate Wall Street business—his greatest pride, the lifelong occupation of his brother and sons—was blurred beyond repair. While the Ponzi scheme was nearly out of money, the Madoff brokerage firm wasn’t. Its bank accounts were healthy, its credit was good, and its business looked strong, at least from the outside. Indeed, under the direction of Madoff’s sons, the firm’s proprietary trading desk was generating profits for the firm and consistently outperforming the overall market. And it still handled an impressive share of the market’s trading volume. So, as a stopgap measure, Madoff moved some of his legitimate firm’s money into his Ponzi scheme’s bank account on November 3, 2005, to cover its outstanding cheques.

…

But he did attend the benefit and, at some point during the evening, approached Hofstra’s president and chatted about pledging $1 million to the school. Madoff’s family also enjoyed the surging wealth, of course; why wouldn’t they expect to share in Bernie’s obvious success? Peter Madoff and Madoff’s sons may have known that the market-making business was down to tissue-thin profit margins. The proprietary trading desk’s profits were good but fluctuated with the markets. But, increasingly, those sources of revenue were dwarfed by the money supposedly being generated by Madoff’s hedge fund business. As they all knew, this was true at many Wall Street firms these days. For years, as Madoff’s hedge fund business had grown, the firm had supported the family’s lifestyle in an ever-grander fashion.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined
by Lasse Heje Pedersen
Published 12 Apr 2015

PART I Active Investment CHAPTER 1 Understanding Hedge Funds and Other Smart Money There are many types of active investors who make markets efficiently inefficient. These investors include large sophisticated pension funds with in-house trading operations, endowments, dealers and proprietary traders at investment banks, trading arms at commodity producing firms, mutual funds, proprietary trading firms, and hedge funds. In each case, the traders have slightly different contracts or profit-sharing agreements and face different political and firm-specific pressures and concerns. Since the focus of this book is the trading strategies, not the players, it would take us too far astray to discuss each of these trading set-ups in detail.

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Hedge funds try to assess transaction costs before they trade, trading off the cost of trading against the benefits. To do this, they also look at market conditions such as the current bid–ask spread and the depth of the limit order book. Whereas the largest hedge funds often use their own proprietary trading systems and transaction cost estimates, a number of investment banks and specialized trading firms offer to execute trades efficiently using their trading systems and offer advice regarding expected transaction costs. Let’s try to get a sense for the magnitude of transaction costs for professional traders.

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These losses led some firms to start reducing risk and raise cash by selling liquid instruments such as their stock positions, hurting the returns of common stock-selection strategies. The money markets started breaking down, and some banks strapped for cash closed down some of their trading desks, including quant equity proprietary trading operations. Simultaneously, some hedge funds were experiencing redemptions. For instance, some funds of funds (hedge funds investing in other hedge funds) hit loss triggers and were forced to redeem from the hedge funds they were invested in, including quants. While the subprime credit crisis had little to do with the stocks held by quants, quant liquidation meant that high-expected-return stocks were being sold and, to close short positions, low-expected-return stocks were being bought.

The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It
by Timothy Noah
Published 23 Apr 2012

It imposed new capital requirements to limit bank leveraging; gave corporate shareholders the chance to approve or disapprove (in a nonbinding vote) executive compensation; removed from existing regulations explicit reliance on the major rating agencies, which had become co-opted by the banks, as arbiters of financial soundness; restricted banks’ proprietary trading; required hedge funds, which previously operated free of government supervision, to register with the Securities and Exchange Commission; lowered the interchange fees that banks charged retailers whenever purchases were made with debit cards; and created the Consumer Financial Protection Bureau, a new agency charged with preventing banks from deceiving customers by imposing hidden fees and the like.

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If the lobbyists and their Republican supporters fail, the top 0.1 percent may increase its income share anyway—but a first step will have been taken, allowing further steps to be taken in the future that might make some difference. That’s precisely why Wall Street is fighting so feverishly the imposition of Dodd-Frank’s (relatively mild) restrictions. The matter of proprietary trading, which is nominally banned under Dodd-Frank (but in fact will continue in certain forms), is itself an inequality issue, the University of Chicago’s Raghuram G. Rajan pointed out in his 2010 book Fault Lines. The inequality here concerns information. “Banks that are involved in many businesses obtain an enormous amount of private information from them,” Rajan wrote.

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“Banks that are involved in many businesses obtain an enormous amount of private information from them,” Rajan wrote. “This information should be used to help clients, not to trade against them.” In theory, banking firewalls prevent traders from becoming privy to information available to bankers; in practice traders have access to it. Rajan conceded that some activities that might be defined as proprietary trading will remain necessary—for instance, to manage risk. But “an initial crude limit,” he wrote, could be “refined over time with experience.” The perfect is the enemy of the good, and the good can be improved in the long term. The next step in banking reform ought to be more radical. The too-big-to-fail banks must be broken up.

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History
by Alexis Stenfors
Published 14 May 2017

How much is generated from customer flows (i.e. from the bank having a customer franchise in the currencies and financial instruments I traded)? How much do you make from arbitrage activities? How much is derived from fundamental analysis, macroeconomic views and proprietary trading (effectively placing bets using the bank’s money)? My answers to such questions might provide clues as to whether I took my own initiatives or largely relied on my current employer’s customer base. They therefore also hint at my risk appetite. Proprietary trading often involves more active risk taking, whereas customer flows less. However, the main question also involves a form of psychological self-assessment on the part of the interviewee, essentially asking: ‘What kind of mental accounting do you perform within your environment?’

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It is not a straightforward process to assess the individual contribution of such ‘accounts’. Market making was what I had been trained to do from the start, while arbitrage and various mathematical strategies were areas where I felt very comfortable. Growing the customer franchise and increasing the market share was something that spurred me on. Proprietary trading interested me. My answer therefore tended to be ‘a bit of everything’, which generally seemed to be regarded as a good answer. Thus, different traders might have different attitudes to risk. More fundamentally, even a single trader might have very different attitudes to different types of risk.

Flash Boys: Not So Fast: An Insider's Perspective on High-Frequency Trading
by Peter Kovac
Published 10 Dec 2014

Which brings us, full circle, back to where we started with dark pools. The Chipotle example didn’t rely on high-frequency pinging, “detectable patterns,” or orders held hostage. It did involve sending an order to Goldman Sachs’ dark pool without any assurances about whether or not Goldman’s proprietary trading group would have special access to the order. Rich Gates decided to see if there was anything to fear when he set up an arbitrage situation and dropped it into the lap of Goldman Sachs. Based on what Lewis wrote, it sounds like he found out. Broker-dealers are High-Frequency Traders – or Anything Else It’s not critical to the book, but it’s yet another demonstration of its ridiculous leaps that Lewis assumes that a trading venue – Credit Suisse’s Crossfinder in this case – caters to high-frequency traders because it says that its clients are broker-dealers: “All the large high-frequency firms, Schwall knew, were “broker-dealers.”

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The anemic per-trade profit margins don’t work well in a firm like Goldman, where it’s more expensive to handle back office operations (and investors expect very high profit margins). Their technology is burdened by hundreds of legacy requirements. But it’s also worth noting that Goldman had to get out of high-frequency trading anyway. The Volcker Rule, a product of the Financial Crisis, prohibits banks like Goldman from doing any proprietary trading in the future. They have until July 2015 to wind everything down. So if Goldman didn’t shutter their high-frequency trading now, it would have happened sometime in the next sixteen months. Goldman could have issued a press release saying, “We’re quitting high-frequency trading since we have to, and we’re not very good at it, anyway.”

Quality Investing: Owning the Best Companies for the Long Term
by Torkell T. Eide , Lawrence A. Cunningham and Patrick Hargreaves
Published 5 Jan 2016

Independent, long term, and tenacious Handelsbanken also illustrates how good managers are independent-minded – acting according to prudent conviction despite prevailing winds or consensus sentiment. The Swedish bank contradicts prevalent practices at peer financial institutions: it boasts a decentralized management structure, uses a profit-sharing plan rather than banker bonuses, and embraces a risk aversion that discourages proprietary trading. These traits enabled the bank not only to weather the 2008 financial crisis but to be a supplier of capital during the period. Of course, this kind of independent thinking is easier in companies with dominant shareholders or family control, features that insulate against pressure from both rivals and stock markets.

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Its management philosophy is to take risks only in areas where it has demonstrable strengths and to minimize all others. It has consistently run a conservative liquidity profile, with superlative capital ratios and longer duration of funding versus peers. Unlike most large European banks, Handelsbanken eschews high-risk, speculative proprietary trading. These cultural traits explain why, during the global financial crisis of 2008, Handelsbanken was a net lender to peer banks and the overall banking system, including lending to the Swedish Central Bank. In an earlier financial crisis afflicting Swedish banks in the early 1990s, Handelsbanken was also the beacon of strength: it was the only Swedish bank that did not receive state aid or become nationalized.

Boomerang: Travels in the New Third World
by Michael Lewis
Published 2 Oct 2011

Most are either explicitly state-backed or small savings co-ops. Commerzbank, Dresdner Bank, and Deutsche Bank, all founded in the 1870s, are the only three big private German banks. In 2009 Commerzbank bought Dresdner. Both turned out to be loaded with toxic assets, and so the merged bank required a government bailout. “We are not a proprietary trading nation,” says Müller, getting pretty quickly to the nub of Germany’s banking problems. German banking was never meant to be a high-stakes affair. Banking, done in the proper German fashion, is less a free enterprise than a utility. “Why should you pay twenty million to a thirty-two-year-old trader?”

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Yet the bonds were becoming radically more risky, because the loans that underpinned them were becoming crazier and crazier. After he left, Röthig explains, IKB had only five investment officers, each in his late twenties, with a couple of years’ experience: these were the people on the other end of the bets being handcrafted by Goldman Sachs for its own proprietary trading book, and by other big Wall Street firms for extremely clever hedge funds that wanted to bet against the market for subprime bonds. The IKB portfolio went from $10 billion in 2005 to $20 billion in 2007, Röthig says, “and it would have gotten bigger if they had had more time to buy. They were still buying when the market crashed.

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It
by Anat Admati and Martin Hellwig
Published 15 Feb 2013

Many of these large conglomerates failed to perform well and were later broken into smaller, more focused corporations.32 Reducing the size and scope of large banks could make them more efficient as well, but the subsidies associated with size—as well as managerial entrenchment, which is also observed in other industries—have so far prevented this from happening.33 Several reform proposals aim to protect depositors and deposit insurance from the risks of investment banking. In the United States the so-called Volcker Rule seeks to ban proprietary trading by deposit-taking institutions. In the same spirit, the Independent Commission on Banking (ICB) in the United Kingdom has proposed to “ring fence” retail banking, deposit taking, and lending in special institutions that would not be allowed to engage in investment banking. In the European Union, a group of experts set up by the European Commission under the chairmanship of Finnish central bank governor Erkki Liikanen has put forward a similar proposal.34 These proposals presume that concerns about depositors and the payment system are, or should be, the major reason for government interventions in banking, for guarantees and bailouts as well as banking regulation.

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On controversies regarding how to account for losses on loans, see also Floyd Norris, “Accounting Détente Delayed,” New York Times, July 19, 2012. 14. These investments reflect the investment banking activities in which JPMorgan Chase, as a universal bank, is also engaging. Traditional investment banking involves financial services for corporations and investors as well as securities trading on a bank’s own account, so-called proprietary trading. Investment banking services for corporations traditionally involve advice and marketing in connection with offerings of securities and with mergers and acquisitions. Investment banking services for investors traditionally involve investment advice and portfolio management services. Trading on their own account arises naturally if the investment bank “underwrites” a public offering, that is, if it buys the entire lot of equity shares or bonds and resells them to the public.

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Meltzer, Allan. 2012. Why Capitalism? New York: Oxford University Press. Melzer, Brian T. 2012. “Mortgage Debt Overhang: Reduced Investment by Homeowners with Negative Equity.” Working paper. Northwestern University, Chicago. Merkley, Jeff, and Carl Levin. 2011. “The Dodd-Frank Act Restrictions on Proprietary Trading and Conflicts of Interest: New Tools to Address Evolving Threats.” Harvard Law and Policy Review 48: 515–553. Merton, Robert C. 1973. “Theory of Rational Option Pricing.” Bell Journal of Economics 4 (1): 141–183. Merton, Robert K. 1957. “The Self-Fulfilling Prophecy.” In Social Theory and Social Structure, rev. and enl. ed.

The Missing Billionaires: A Guide to Better Financial Decisions
by Victor Haghani and James White
Published 27 Aug 2023

While we don't have a figure for the total profitability of the proprietary trading activities run by Meriwether over the entire 20‐year period, we do know from a 1993 Salomon public disclosure, that in just the 4 years to 1993, its proprietary trading activities had generated $3.42 billion in income, representing more than 100% of its pretax income in 1990–1992, and a substantial fraction of its net income in 1993. To put this further into context, Salomon Brothers had an average amount of book equity over these years of $4.3 billion, which was only partially allocated to these proprietary trading activities. Source: Salomon Inc. 1993 Annual Report. 2.

Madoff: The Final Word
by Richard Behar
Published 9 Jul 2024

To understand the architecture of the fraud, it’s essential to know that BLMIS was composed of four business units, three of them housed (starting in 1987) in 885 Third Avenue—the iconic Lipstick Building, so named because the thirty-four-story, red-granite skyscraper resembles a giant tube of lipstick—and one based in London. Think of each unit as a separate company, for the most part, under Bernie’s umbrella. The nineteenth floor, the home of two of the units of BLMIS: the largely legitimate broker-dealer and proprietary trading wings. In “prop trading,” as the latter is known in Wall Street parlance, traders buy and sell equities from the company’s own inventory of stocks in order to produce profits. Bernie allowed those traders to keep 25 percent of their net trading gains, in line with most Wall Street firms’ practices.

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MADOFF: Whenever we’re asked about our relationship with any of these funds [such as Vijay’s], number one, we really have never seen any of your documentation, you know, like the stuff you send out to your clients, you know—because we never want to be looked at as the investment manager [note: which Bernie is, of course]…. [If] we’ve ever been asked about what our role is with any of these type of funds, it has always been that we are the “executing broker” for these transactions and that you use a proprietary trading model that has certain parameters built into it which have been approved by you and then that’s part of the trading directive that you’re seen. VIJAY: Right. [In fact, FGG had no such trading model, as it didn’t have a clue what Bernie did with its money.] MADOFF: And by the way, the trading directives that you sent me is an old one, all right—we’re going to send you up, actually, we’ll messenger it up to you today—a new trading authorization directive that we had actually a couple of years ago—the options are no longer part of the model.

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“If they couldn’t figure out that they were losing money on every transaction and trying to make it up on volume, they should have. And, given the lifestyle they were living, yes, they should have known that something was unsustainable there.” Records show that over the last decade of BLMIS’s existence, nearly $800 million was diverted from the phony IA business and moved into the market making and proprietary trading businesses the sons ran—businesses that were bleeding out red during those years. The various BLMIS units became financially incestuous. From the mid-1990s until the end, Mark was paid more than $33 million, including bonuses totaling $14 million just from 2006 and 2007. Not included in that figure is $6.5 million for a house on the island of Nantucket, plus $8.5 million in “loans” from his mother for two Manhattan apartments—money that originated in the 703 Ponzi account at Chase.

The Handbook of Personal Wealth Management
by Reuvid, Jonathan.
Published 30 Oct 2011

Multistrategy managers may be active in strategies such as long/short equity, market neutral equity, event driven, distressed and ABL/ABS. The advantage of multistrategy operations is that they have the ability to move capital quickly between trading strategies as opportunities arise. Throughout 2008 we have witnessed the proprietary trading desks of the investment banks diminish in size. Perhaps this may create significant opportunities for some multi-strategy operations going forward. 2008 hedge fund review Hedge funds are often thought to be absolute return vehicles; however, the underlying assets in which they trade are often the same equities, bonds and commodities found in many long-only manager portfolios.

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Distressed managers will be able to position themselves with very cheap assets in the right part of the capital structure. Those managers who have the resources to unpick the carnage that has occurred in the asset-backed markets, and to value the underlying assets, will be in an ideal position to generate substantial returns. Further, hedge funds will face less competition with investment bank proprietary trading desks largely disappearing from the market. The reduction in bank lending may present significant opportunities for lending-based hedge fund strategies, which may in turn be able to command higher interest rates and increased equity participation through warrants. 35 1.4 Capital-protected and structured investments Stephen Ford, Brewin Dolphin Ltd Capital-protected equity investments are also known as structured products and have been available for over a decade.

The Money Machine: How the City Works
by Philip Coggan
Published 1 Jul 2009

That spelled the end for the old British-style merchant bank, which was often a private business, run by a small group of partners. It also meant that, having raised large amounts of capital, investment banks started to move into new areas. They used their expertise to deal on their own behalf, through proprietary trading desks. They sold their expertise to clients as asset managers. They dreamed up exotic new products, particularly in the derivatives markets, and sold them round the world. They lent money to favoured clients such as hedge funds and private equity groups (see Chapter 9). This has earned investment bankers a lot of money.

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Derivative instruments, such as futures and options, can be difficult to understand and can behave in unpredictable ways. It can be easier to disguise losses for long periods. Even when traders are not careless or fraudulent, they can just be wrong. When markets fall sharply, banks often face losses from their proprietary trading activities. Even the more standard activities of arranging new issues and takeovers can be highly volatile; when markets are in the doldrums, few companies use the stock market to raise capital and few bids are announced. Market downturns in the early 1990s or in 2000–2002 caused a number of banks to announce write-offs to profits.

Where Does Money Come From?: A Guide to the UK Monetary & Banking System
by Josh Ryan-Collins , Tony Greenham , Richard Werner and Andrew Jackson
Published 14 Apr 2012

Similarly, ‘Wholesale banking’ involves the provision of lending and assistance (including underwriting) to institutions such as governments and corporations rather than lending to individual customers. Wholesale banking can include assistance in raising equity and debt finance, providing advice in relation to mergers and acquisitions, acting as counterparty to client trades and ‘market-making’ (investment banking). An investment bank may also undertake trading on its own account (proprietary trading) in a variety of financial products such as derivatives, fixed income instruments, currencies and commodities. Note that investment banks need not necessarily hold a licence to accept deposits from customers to carry out some of these trading and advisory activities. This theory is incorrect, for reasons that will be covered below.

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The process and the calculations are carried out daily by Thomson Reuters on behalf of the British Bankers Association, the trade group representing British banks. LIBOR is important, because a substantial volume of financial contracts are priced in relation to it (amounting to many trillions of pounds) and banks – often those participating in determining it – are counterparties in these contracts and their derivatives or proprietary trading desks also bet on the movement of LIBOR. In theory, if the Bank of England is operating a corridor system (see Appendix 1) then the LIBOR rate should not exceed the boundaries set out by the corridor. We would expect that no bank would deal in the market on worse terms than it could receive from the Bank of England.

Fed Up!: Success, Excess and Crisis Through the Eyes of a Hedge Fund Macro Trader
by Colin Lancaster
Published 3 May 2021

The strategy’s broad mandate permits portfolio managers to invest in virtually any instrument, anywhere in the world. This makes it unique. It also makes macro managers great at cocktail parties since they can talk about almost anything. The origins of many high-profile global macro traders can be traced back to investment-bank proprietary trading businesses, and to places such as Commodities Corporation, and, of course, Soros Fund Management. These macro pioneers created platforms within their firms that trained a new generation of portfolio managers, a next wave of great macro investors, who started their careers at those earlier shops and went on to launch firms such as Duquesne Capital, Tudor Investment Corporation, Moore Capital, Caxton Associates, and Brevan Howard.

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* I decide to walk home after the market closed. It’s a nice night. As I walk, I think. Wall Street traders used to be the big swinging dicks. The guys at Solly, then Milken’s crew at Drexel, and then Goldman took things up a notch. Back in its vampire squid days, Goldman ruled the world. It had the best proprietary trading operation in the world. It called people muppets and used to rip people’s faces off. The firm had all the advantages: created the instruments, sold them to you, knew where all the bonds were, knew what you owned, front-ran your orders, saw all of the flows, and took the most risk. And it was even worse if you were on the ropes, if things were going against you, because Goldman was competing with you.

Makers and Takers: The Rise of Finance and the Fall of American Business
by Rana Foroohar
Published 16 May 2016

He continued to work on Wall Street after his public shaming, even though he left National City in disgrace just days after taking the stand and paid government officials (with whom he’d done many cozy deals) $1.1 million in back taxes.35 The crisis had one big upside, though. Senator Glass, along with Congressman Henry Steagall, crafted the Glass-Steagall Act to separate commercial and investment banking in the United States. For more than six decades afterward, the law helped to ring-fence commercial lending from risky proprietary trading. Glass-Steagall also created the Federal Deposit Insurance Corporation (FDIC), which insured bank depositors up to $5,000 each, reducing the risk of bank runs and assuring the general public that it would be safe in case of a financial crisis. Finally, the legislation put limits on the amount of interest that banks could offer savers to attract their money.

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Then there’s market making and pure trading—that’s what Goldman Sachs or Glencore, the Swiss-based trading firm founded by Marc Rich, might do—though, again, industrial companies like BP can also do it in their capacity as swaps dealers. Lines start to get blurry here between what’s socially useful and what’s not, especially when you get into a fifth category, proprietary trading, or “prop” trading as it’s known in the industry. That’s when financial intermediaries and other big market makers are simply trading for their own profit, rather than to hedge any underlying assets. Activities of this kind are now illegal under the Volcker Rule, but as former CFTC chairman Gary Gensler says, “it’s very tough to prove what is permitted prop trading, what is legitimate market making, and what is pure speculation.”

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As just one example of many, in the year after Dodd-Frank’s passing, Goldman Sachs (the most active among financial institutions) paid eighty-three visits to regulators to discuss topics like derivatives reform.11 In 2013, Duke University academic Kimberly Krawiec published a startling research paper analyzing more than eight thousand public comment letters received by the Financial Stability Oversight Council as it prepared to study the ways of implementing the Volcker Rule, a particularly contentious piece of the Dodd-Frank reform that aimed to reinstate some of the spirit of the Glass-Steagall legislation by separating risky proprietary trading from federally insured commercial banking. Krawiec analyzed the meeting logs of the Treasury Department, Federal Reserve, Commodity Futures Trading Commission, Securities and Exchange Commission, and Federal Deposit Insurance Corporation. The bottom line? “Financial institutions, financial industry trade groups, and law firms representing such institutions and trade groups collectively accounted for roughly 93% of all federal agency contacts on the Volcker Rule,” between July 2010 and October 2011.

The Spider Network: The Wild Story of a Math Genius, a Gang of Backstabbing Bankers, and One of the Greatest Scams in Financial History
by David Enrich
Published 21 Mar 2017

And the interests of a trader whose performance was measured based on how much he helped clients versus one who was rewarded based on how much money he raked in through his own trading—well, they were very different. So were the interests of a bank that mainly focused on its clients’ needs and one that profited in large part from trading that was divorced from—and sometimes diametrically opposed to—what its customers wanted. The art of making money through this so-called proprietary trading was partly in the timing: Bet on something that’s cheaply priced, protect yourself with an offsetting position, get rid of the original asset just as it reaches its peak value, extricate yourself from the offsetting hedge position, and pocket the proceeds. In the ideal scenario, savvy traders managed to construct enough overlapping hedges that they virtually eliminated any downside risk and guaranteed themselves a small profit, regardless of which way markets moved.

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Goodwin was staying at the luxurious Four Seasons; Hayes was in a crummy hotel down the street from RBS’s offices. Misreading the cues, Hayes ribbed the CEO about his posh digs and jokingly complained that he wasn’t permitted to stay there. The attempt at humor fell flat with the ill-tempered Goodwin. RBS had a small office in Tokyo, and most of its trading business involved proprietary trading, in which traders made large bets simply using the bank’s money; there was no ancillary business of making markets for or otherwise helping clients. Goodwin was introduced to a group of traders. He looked at each of them, asking what they did for the bank. “Prop trading,” came the proud response.

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187, 190–93 at Lehman Brothers, 185–86 People’s Journal, 188 Perfect, David, 94–95 Pieri, Donna, 89, 314 Pieri, Mike, x anti-Hayes efforts, 289, 290, 292–94, 313–14 background of, 89 Hayes departure, 292–94, 313–14 Hayes hiring, 60 Hayes performance review, 143 Hayes trading, 92, 160, 166, 231 Justice investigation, 342 Lehman’s collapse, 165, 231 Libor investigation, 315–16 Libor manipulation, 99, 99n, 115, 166, 176, 221–22, 233, 238, 238n overnight index swaps, 103 resignation of, 342 switch trades, 173, 173n at UBS, 89–90 update on, 445 Pinewood Studios, 412 Pitt, Brad, 237 plea bargains, 348 Porter, Chris, 111 Porter, Laurence, x background of, 245 Libor submissions, 245, 259, 276–77, 279–80, 280n, 284, 295 update on, 445 PricewaterhouseCoopers, 400 Prince, Charles, 275 Prinz, Sascha, x, 105, 145, 159, 166, 304 Project Green, 334 proprietary trading, 19–20, 36–37 public pension funds, 113–14, 404 Queen Camilla (Townsend), 138–39 Queens Park Rangers (QPR), 11, 15, 56, 125, 145, 147 Qureshi, Shah, 345–46 Rabobank, 109, 163–64, 166, 404, 456 “Rate Probe Keys on Traders,” 346–47 Ravazzolo, Fabiola, 189, 195 RBC. See Royal Bank of Canada RBS.

How I Became a Quant: Insights From 25 of Wall Street's Elite
by Richard R. Lindsey and Barry Schachter
Published 30 Jun 2007

That is not how it worked out, but in the end it was a great introduction to quant research. For a first job on Wall Street, things went pretty well. I learned a great deal and I worked at a truly first rate firm. I also met a number of people who have had a tremendous influence on my career. One person in particular was Peter Muller. Peter was running a proprietary trading group that was considered by everyone to be the crème de la crème of the equities division. I did not know—and still do not know—exactly what they did, but whenever his group was mentioned, people were abuzz with excitement. Peter was outgoing and friendly and made an effort to get to know the quant research guys.

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So I pitched the same idea BARRA had turned down—using quantitative models to do proprietary JWPR007-Lindsey May 7, 2007 17:32 Peter Muller 313 trading. Very sensibly, they asked if I had any experience trading. Aside from a little speculation in stock index futures, I hadn’t traded at all. So I played up the poker playing experience. I guess they bought it, because they offered me a job creating a proprietary trading group. I was guaranteed a nice multiple of my BARRA compensation for each of the next two years. This was pretty good, because it was already May and I didn’t have to start until September. Wall Street paid a lot better than consulting! I took the summer off, went to Hanalei, Kauai, one of my favorite places in the world, and hung out for six weeks, getting ready for the next phase of my career.

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John’s University in 1977, an MA in quantitative economics from the State University of New York in 1978, and a PhD in financial economics from the State University of New York at Stony Brook in 1982. Peter Muller is a senior advisor at Morgan Stanley and provides ongoing counsel to Process Driven Trading, a proprietary trading group he founded in 1992. Prior to joining Morgan, Mr. Muller was with Barra for seven years. He created the BARRA Brainteaser, a monthly investmentrelated puzzle. Mr. Muller graduated with honors from Princeton University with a BA in mathematics. He is a member of the editorial board for the Journal of Investment Management and has previously served in the same capacity for the Financial Analysts Journal and the Journal of Portfolio Management.

The End of Growth
by Jeff Rubin
Published 2 Sep 2013

The financial industry is overdue for a deep structural overhaul that will help to eliminate some of the conflicts of interest that led to the 2008 financial crisis. During the Great Depression, for instance, US lawmakers adopted the Glass-Steagall Act, legislation that separated the different parts of a bank’s business. Under the act, a bank’s traditional deposit-taking business was walled off from the proprietary trading desks that make huge leveraged bets in stock, bond and currency markets. Separating bankers lending money from traders investing money, the thinking went, would help to mitigate the type of rampant speculation that led to the stock market crash of 1929. Wall Street, of course, chafed at having its wings clipped.

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So far, a push back toward the days of Glass-Steagall has been rebuffed. Until changes are made, however, don’t expect to see taxpayer-funded bank bailouts end anytime soon. Consider what happened at Swiss-based UBS, one of the world’s largest and most reputable banks. In September 2011, a mid-level employee on the bank’s proprietary trading desk racked up a $2.3-billion loss. That was a hard hit to UBS’s bottom line. But it’s even worse for the Swiss taxpayers who will end up bailing out the banking giant in the event of another credit crisis. But can any of us really expect anything different in a system that rewards risk takers with annual bonus checks in the seven figures and leaves taxpayers to backstop the losses when big bets go horribly wrong?

Flash Boys: A Wall Street Revolt
by Michael Lewis
Published 30 Mar 2014

Citigroup, weirdly, insisted that Spread reroute the line from the building next to the Nasdaq in Carteret to their offices in lower Manhattan, the twists and turns of which added several milliseconds and defeated the line’s entire purpose. The other banks all grasped the point of the line but were given pause by the contract Spread required them to sign. This contract prohibited anyone who leased the line from allowing others to use it. Any big bank that leased a place on the line could use it for its own proprietary trading but was forbidden from sharing it with its brokerage customers. To Spread this seemed an obvious restriction: The line was more valuable the fewer people that had access to it. The whole point of the line was to create inside the public markets a private space, accessible only to those willing to pay the tens of millions of dollars in entry fees.

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Ronan moved the computers from Kansas City to Radianz’s data center in Nutley and reduced the time it took them to find out what they had bought and sold from 43 milliseconds to 3.8 milliseconds. From that moment the demand on Wall Street for Ronan’s services intensified. Not just from banks and well-known high-frequency trading firms but also from prop shops (proprietary trading firms) no one had ever heard of, with just a few guys in them. All wanted to be able to trade faster than the others. To be faster they needed to find shorter routes for their signals to travel; to be faster they needed the newest hardware, stripped down to its essentials; to be faster they also needed to reduce the physical distance between their computers and the computers inside the various stock exchanges.

Finding Alphas: A Quantitative Approach to Building Trading Strategies
by Igor Tulchinsky
Published 30 Sep 2019

Six years later, former Columbia University computer science professor, David Shaw, launched D.E. Shaw & Co. in New York City. Shaw had spent two years at Morgan Stanley, part of a group whose mandate was to develop stock forecasting algorithms using historical price records. Others followed, either inside banks and brokerages as part of proprietary trading groups or at hedge funds managing pooled investor money. Perspectives on Alpha Research9 Over time, quantitative market-neutral investing became known as a scalable and dependable investment strategy, which fared particularly well during the dot-com market crash of the early 2000s. As the hedge fund industry grew, so did the allocation of investor capital to quantitative investment strategies.

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As a result, in contrast to the equities universe, where the core liquid assets are all traded by the same population of investors for the same purposes, many properties are much less comparable across the entire universe of futures or forwards. In recognition of the differences among market participants, many market-making and proprietary trading organizations have specialists managing the trading of different classes of futures and currencies, with the classes based on sets of similar underlying assets. This further reinforces the differences among “sectors,” as different traders, desks, and business lines manage different futures and forwards.

The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything
by Jason Kelly
Published 10 Sep 2012

The former chairman of the Federal Reserve lent his name to a key piece of reform, the Volcker Rule, a central tenet of the Dodd-Frank legislation aimed at preventing another financial meltdown and series of bailouts. The Volcker Rule at its most basic seeks to limit what big banks can do with their money, thereby diminishing the risk they can take as federally insured, deposit taking institutions. That means strict limits on what’s known as proprietary trading and principal investments. During the early part of this century, a number of banks, most notably Goldman Sachs, grew their investing arms into massive institutions in their own right. Goldman’s 2007 private-equity fund totaled about $20 billion, second only in history to Blackstone’s $21.7 billion raised that same year.

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The deal with New Jersey’s pension plan, which came on the heels of the Texas teachers’ new arrangement with KKR and Apollo, was the first public indication of something that had been brewing inside Blackstone for much of that year, spurred largely by Schwarzman himself. Earlier that year, Schwarzman called a meeting of the entire firm and pressed each piece to talk about what they were seeing in the markets. He realized he was getting detailed analysis, the kind of insights the likes of Goldman Sachs had used to create its powerful and lucrative proprietary trading desk. Schwarzman was faced with a decision: use the firm’s money to trade on these ideas, or set up a new sort of business, or set of products, and start selling it to the biggest pools of capital in the world. The pitch to them is akin to what New Jersey is getting—the ability to more easily move money around to whatever Blackstone, in consultation with the client, decides is the best strategy for the current market or return expectation.

Heads I Win, Tails I Win
by Spencer Jakab
Published 21 Jun 2016

I hesitated awkwardly for a second before heaping praise on his intellect and work ethic, both more or less true, without explicitly saying anything about his fund’s prospects. It was a sin of omission, but I told myself that, after all, I didn’t know he would struggle. Of course he did. After the fund folded, he “blew up” a proprietary trading desk at a European bank. The last I heard he was employed again at another U.S. bank. I’m happy for him and figure that, as long as he’s giving advice to people who themselves are paid to manage money, they have only themselves to blame for acting on it. But what about the advice of analysts in general?

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Habit 7: Use a “System” I had intended to call this book Rule the Freakin’ Markets. But then I remembered that Michael Parness beat me to it. Who is Parness? If you take him at his word, he went from being homeless to parlaying a few thousand dollars in savings into $7 million through a proprietary trading system he developed. He was generous enough to share this valuable knowledge with others for the low, low price of $224.75 on DVD plus shipping and handling. Guidance on what to buy and sell and when, his “Ninja Trading” service, ran an additional $429 a month. A few years ago Parness was all over the radio with his advertisements for “Trend Trading to Win.”

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society
by Will Hutton
Published 30 Sep 2010

This will help to build more contrariness into the system’s DNA, but we should go further. We need to create a diverse range of banking business models, to replace a world in which banks play cat and mouse with each other through their proprietary trading desks in a zero-sum game of trying to catch each other out by betting on future derivative prices – in effect, gambling deposits in a volatile market. Paul Volcker suggests that deposit-taking banks should be prohibited from using that capital to support their proprietary trading operations, thereby separating the two operations. If this is done, banks will have to develop business models in which they grow their balance sheets and lending not through trading in derivatives, but by lending to businesses and consumers.

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British bankers took the opportunity afforded by the abolition of exchange and capital controls, globalisation, Britain’s historic strength in financial services and the prevailing free-market ideology to build a position of influence in the British state that was much more formidable than any that had been enjoyed by the trade unions. The City reclaimed ancient privileges to restore its nineteenth-century position as an international financial centre, although this was now built upon proprietary trading in financial derivatives and securitisation. This was the purposeful, positive use of power to achieve a feasible aim – a dominant City of London. Light-touch regulation became as important a mantra to the City as free collective bargaining had been to the unions. Equally, the freedom to exploit tax havens and relieve foreign nationals from their tax obligations was as pivotal to City power as the unions’ insistence on legal immunity from damages in industrial disputes had been to theirs.

How Money Became Dangerous
by Christopher Varelas
Published 15 Oct 2019

Meriwether was one of the most powerful people at the firm, vice chairman of the board and the head of the high-stakes proprietary trading operation. While most salesmen and traders worked for the clients and collected commissions on those deals, Meriwether and his proprietary traders used the firm’s own capital to take positions on behalf of the firm. They were operating on a much larger scale than other traders; essentially, Salomon became its own biggest customer. The most often used analogy was that of a Vegas casino: The basic commission trading for clients resembled a sea of slot machines, steadily accruing profits, coin by coin; proprietary trading, however, was similar to the “whale” gambling alone at a blackjack table, betting a giant stack on every hand.

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If Meriwether bet right, Salomon Brothers had a great quarter. If not, Salomon had a bad quarter, regardless of sales and trading revenues. While the client-and-commission operation was necessary in order to create and maintain the firm’s trillion-dollar balance sheet, the biggest action by far was happening with Meriwether’s proprietary trading. Meriwether lobbied successfully for a change to the pay structure in the late 1980s, marching into Gutfreund’s office and arguing that since his team was making many times more money for the firm than anyone else, their compensation should reflect that profitability. Gutfreund acquiesced, and, with the knowledge of only two of the other nine members of the executive committee, he allowed Meriwether’s team to collect bonuses of 15 percent of what they made for the firm, while other departments split a much more modest bonus pool.

Capitalism: Money, Morals and Markets
by John Plender
Published 27 Jul 2015

Their counterparts in the US face much tougher jail sentences and tend to show more humility, or reveal new-found religious belief, when they come out.130 Today, much of the financial speculation that goes on has become institutionalised in the banking system. From the early 1980s, big banks moved from being deposit takers and lenders to holding conglomerate status with substantial trading operations. These mega-banks started to sell most of the loans they initiated in packaged form to investors and to run large proprietary trading departments to take bets in the markets for their own account. Andrew Haldane of the Bank of England has estimated that the share of the major global banks’ assets held in their trading books doubled between 2000 and 2007 from 20 per cent to 40 per cent. The growth especially of trading in derivative instruments and structured products such as collateralised debt obligations and credit default swaps has been spectacular.

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When all this trading came to grief as the financial world came crashing down in 2007–09 and the biggest banks had to be bailed out by the taxpayer, the Jeffersonian antipathy for finance naturally enjoyed a vigorous new lease of life, leading to the greatest re-regulatory effort since the 1930s, an effort that included attempts to curb the banks’ proprietary trading. Yet the battle between the politicians and the banks is uneven, because Big Money in the US pays for politicians’ campaign finance. No sooner was the reforming Dodd–Frank Act placed on the statute book than an army of politicians, with wads of money from Wall Street in their back pockets, worked strenuously to dismantle it.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
by Nassim Nicholas Taleb
Published 1 Jan 2001

Indeed Nero’s extensive social life includes almost no businesspeople. But unlike me (I can be extremely humiliating when someone rubs me the wrong way with inelegant pompousness), Nero handles himself with gentle aloof-ness in these circumstances. So, Nero switched careers to what is called proprietary trading. Traders are set up as independent entities, internal funds with their own allocation of capital. They are left alone to do as they please, provided of course that their results satisfy the executives. The name proprietary comes from the fact that they trade the company’s own capital. At the end of the year they receive between 7% and 12% of the profits generated.

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Treasury bonds are safe; they are issued by the United States government, and governments can hardly go bankrupt since they can freely print their own currency to pay back their obligation. No Work Ethics Today, at thirty-nine, after fourteen years in the business, he can consider himself comfortably settled. His personal portfolio contains several million dollars in medium-maturity Treasury bonds, enough to eliminate any worry about the future. What he likes most about proprietary trading is that it requires considerably less time than other high-paying professions; in other words it is perfectly compatible with his non-middle-class work ethic. Trading forces someone to think hard; those who merely work hard generally lose their focus and intellectual energy. In addition, they end up drowning in randomness; work ethics, Nero believes, draw people to focus on noise rather than the signal (the difference we established in Table P.1).

The Hidden Wealth of Nations: The Scourge of Tax Havens
by Gabriel Zucman , Teresa Lavender Fagan and Thomas Piketty
Published 21 Sep 2015

In all likelihood, a loss of €15 billion would be enough to force Switzerland to cooperate truthfully, because it is a sum comparable to what it earns in total by managing the wealth of tax evaders. According to official statistics, the financial sector represents around 11% of Switzerland’s GDP. But private wealth-management activities strictly speaking account for only 4%. The rest corresponds to the activity of insurers and other banking businesses, loans, proprietary trading, and so on. Furthermore, the wealth managed by Swiss banks is not all hidden—that of the Swiss is for the most part indeed declared—so that tax evasion scarcely brings in more than 3% of the GDP (around 1% of the total amount of undeclared assets managed by the banks), or €15 billion per year.

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis
by James Rickards
Published 15 Nov 2016

In 1996, near the height of LTCM’s profits and praise, JPMorgan offered to buy a 50 percent interest in LTCM for $5 billion, a reasonable price considering the management company was making more than $300 million per year in management fees alone. JPMorgan also calculated its ownership position would give it preferred status as an investor, and the opportunity to reap proprietary trading profits. This offer was rejected. In the words of one LTCM partner, “If we’re worth so much money, why would we sell?” This rejection was hubris. If the partners had sold, LTCM would have been part of JPMorgan when the 1998 crisis hit. JPMorgan would have saved LTCM to protect its own reputation.

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Dodd-Frank was more than one thousand pages long in its final form, and was scarcely read by members of Congress who voted on it. Dodd-Frank was an odd mix of genuine reform, pseudo-reform, dereliction, and nonessential matter from lobbyist wish lists. Some Dodd-Frank provisions, including increased capital requirements for banks, and the Volcker Rule, which limited certain forms of proprietary trading, were useful if limited steps in the direction of a safer financial system. The most overhyped provision was “orderly liquidation” authority. In theory, this was a roadmap to wind down failing too-big-to-fail banks without the chaos of the 2008 Lehman collapse and ad hoc bank bailouts. In practice, orderly liquidation is another Washington confection that will break the minute it is tested under real panic conditions.

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
by Gregory Zuckerman
Published 5 Nov 2019

Once, when a new colleague approached to introduce himself, Tartaglia immediately cut him off. “Don’t try to get anything by me because I come from out there,” Tartaglia said, pointing a finger at a nearby window and the streets of New York City.9 Tartaglia renamed his group Automated Proprietary Trading, or APT, and moved it to a forty-foot-long room on the nineteenth floor of Morgan Stanley’s headquarters in a midtown Manhattan skyscraper. He added more automation to the system and, by 1987, it was generating $50 million of annual profits. Team members didn’t know a thing about the stocks they traded and didn’t need to—their strategy was simply to wager on the re-emergence of historic relationships between shares, an extension of the age-old “buy low, sell high” investment adage, this time using computer programs and lightning-fast trades.

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Access Hollywood (TV show), 282 AccuWeather, 80 African Americans, 13–14, 232, 292–94 Alberghine, Carole, 57 Alberghine, Penny, 59–60, 62, 78 Albuquerque Journal, 170 Algebraic Coding Theory (Berlekamp), 93 Almgren, Frederick, Jr., 28 Alphabet, 272–73 alternative data, 311–12 “alt-right,” 278–79, 290 Amazon.com, 134 Ambrose, Warren, 15 America First Committee, 282 American Museum of Natural History, 303 anchoring, 152 Animal Farm (Orwell), xvi anti-Semitism, 46, 185, 303 Apple Computer, 89, 166 AQR Capital Management, 256–57 arbitrage. See Statistical arbitrage Archimedes (yacht), 267, 320 Armstrong, Neil, 170 Artin, Emil, 69 Asness, Clifford, 256–57 Association for Computing Machinery (ACM), 37 astrology, 121–22 autism, xviii, 268, 287, 323–24 Automated Proprietary Trading (APT), 131–32, 133 AWK, 233–34 Ax, Frances, 98 Ax, James, xi, 37, 68–69, 324 at Axcom Limited, 78–83 backgammon, 69, 76–77 background of, 68–69 at Berkeley, 68–69 Berlekamp and, 95–102 conspiracy theories of, 77–78, 99 at Cornell, 69, 70–71 death of, 103 focus on mathematics, 69–70 at Monemetrics, 51–52, 72–73 personality of, 68, 70, 71–72, 98–99 Simons and, 34, 68–69, 99–103, 107 at Stony Brook, 34, 71–72 trading models, 73, 74–75, 77–78, 81–86, 95–101, 107 Axcom Limited, 78–83 disbanding of, 118 trading models, 95–101, 107–18 Ax-Kochen theorem, 69, 70, 103 Bachelier, Louis, 128 backgammon, 69, 76–77 backtesting, 3 Bacon, Louis, 140 Baker House, 15–16 Baltimore City Fire and Police Employees’ Retirement System, 299–300 Bamberger, Gerry, 129–30 BankAmerica Corporation, 212 Bannon, Steve, 279, 280, 280n break with Mercers, 304 at Breitbart, 278–79, 299–300, 301–2 midterm elections of 2018, 304 presidential election of 2016, xviii, 281–82, 284–85, 288–90, 293, 294–95 Barclays Bank, 225, 259 bars, 143–44 Barton, Elizabeth, 272 basket options, 225–27 Baum, Julia Lieberman, 46, 48, 50, 62–63, 65 Baum, Leonard “Lenny,” xi, 45–46, 63–66 background of, 46 currency trading, 28–29, 49–53, 54–60, 62–64, 73 death of, 66 at Harvard, 46 at IDA, 25, 28–29, 46–49, 81 at Monemetrics, 45, 49–60, 63–65 move to Bermuda, 64–65 rift with Simons, 63–65 trading debacle of 1984, 65, 66 Baum, Morris, 46 Baum, Stefi, 48, 62, 63 Baum–Welch algorithm, 47–48, 174, 179 Bayes, Thomas, 174 Bayesian probability, 148, 174 Beane, Billy, 308 Beat the Dealer (Thorp), 127, 163 Beautiful Mind, A (Nasar), 90 behavioral economics, 152, 153 Bell Laboratories, 91–92 Belopolsky, Alexander, 233, 238, 241, 242, 252–54 Bent, Bruce, 173 Berkeley Quantitative, 118 Berkshire Hathaway, 265, 309, 333 Berlekamp, Elwyn, xi at Axcom, 94–97, 102–3, 105–18 background of, 87–90 at Bell Labs, 91–92 at Berkeley, 92–93, 95, 115, 118, 272 at Berkeley Quantitative, 118 death of, 118 at IDA, 93–94 Kelly formula and, 91–92, 96, 127 at MIT, 89–91 Simons and, 2–3, 4, 93–95, 109–10, 113–14, 116–18, 124 trading models and strategies, 2–3, 4, 95–98, 106–18, 317 Berlekamp, Jennifer Wilson, 92 Berlekamp, Waldo, 87–88 Berlin Wall, 164 Bermuda, 64–65, 254 Bernard L.

Reset
by Ronald J. Deibert
Published 14 Aug 2020

For example, in 2019 Mesa, Arizona, made a deal with Google to permit construction of a massive server farm that would guarantee up to four million gallons for cooling purposes.361 While Google has made significant public strides to “green” its server farms and other processes, the company considers its water use a proprietary trade secret and typically forbids public officials from disclosing its water consumption.362 Greenpeace has closely studied the environmental consequences of cloud computing, and in 2017 they published an extensive ranking of social media platforms on the basis of their environmental sustainability efforts.363 Many companies, including Google (notwithstanding its water consumption), Facebook, and Microsoft have made significant improvements in recent years, either offsetting or directly powering their operations with 100 percent clean energy, and investing in server farms in areas like Iceland, where there is plentiful access to cool water and low temperatures.

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Retrieved from https://eta.lbl.gov/publications/united-states-data-center-energy Mesa, Arizona, made a deal with Google to permit construction of a massive server farm: Mesa Council, Board, and Committee Research Center. (2019, July 1). Resolution 19-0809. Retrieved from http://mesa.legistar.com/LegislationDetail.aspx?ID=3998203&GUID=FC6B9CE4-208A-4AC1-AB2A-40255C1E9F74 Google … considers its water use a proprietary trade secret: Sattiraju, N. (2020, April 1). Google data centers’ secret cost: Billions of gallons of water. Retrieved from https://www.bloomberg.com/news/features/2020-04-01/how-much-water-do-google-data-centers-use-billions-of-gallons An extensive ranking of social media platforms: Cook, G. (2017).

Extreme Money: Masters of the Universe and the Cult of Risk
by Satyajit Das
Published 14 Oct 2011

The much-touted Volcker rule, limiting the ability of banks to trade with client money, emerged riddled with loopholes, most notably allowing banks to take positions where they are trading securities and instruments with or for clients. Reviewing the legislation, a leading derivative lawyer told banks: “Given so much of proprietary trading has a client nexus to it, I’ll be embarrassed if I don’t manage to exempt all your activities from the rule.” Large banks promptly shut down their proprietary trading desks, transferring traders to client-focused market-making operations where they continue to trade as before. Legislators and regulators discovered that Groucho Marx was right: “[government] is the art of looking for trouble, finding it, misdiagnosing it and then misapplying the wrong remedies.”

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Regulatory Dialectic Regulators and economists, who contributed to the crisis, offered solutions, confirming Goethe’s observation: “There is nothing more frightening than ignorance in action.” Regulatory initiatives relied on self-confidence, which Samuel Johnson observed is “the first requisite to great undertakings.” Former Fed Chairman Paul Volcker put his name to restrictions on banks trading on their own account or investing in hedge or private equity funds. Proprietary trading is hard to define. Testifying to Congress, Volcker indicated elliptically that bankers knew whether they were trading on proprietary account, recalling U.S. Supreme Court Justice Potter Stewart’s statement that while it was hard to define, he knew pornography when he saw it. Hitherto little-known Arkansas Democratic Senator Blanche Lincoln and her Committee on Agriculture, Nutrition, and Forestry controversially proposed that banks spin off their derivative activities and be prevented from hedging their own genuine risks.

Hedge Fund Market Wizards
by Jack D. Schwager
Published 24 Apr 2012

As a specialist, Benedict gained some much needed experience and developed a feel for the markets. When volume in the XMI started to dry up three years later, Benedict became an off-the-floor index derivatives trader for SLK. In 1993, Benedict’s success as a trader led to his being named the Special Limited Partner for SLK’s newly created proprietary trading department. After Goldman Sachs purchased SLK in 2000, Benedict left to start his own trading firm, Banyan Equity Management. A trading friend describes Benedict’s skill in the market as follows: “He has ‘ it.’ It’s hard to describe it. Why does Ichiro Suzuki repeatedly hit 350? I don’t know.

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Woodriff was frustrated by his inability to raise substantial assets, the 20 percent drawdown from the 1997 high, and most of all by the fact that running the CTA business in addition to trading left him with no time to pursue his true career passion: predictive modeling. Woodriff decided he might do better seeking a proprietary trading job in New York. He returned the remaining assets to his investors, closed Woodriff Trading, and moved to New York to search for a job. A friend of Woodriff had an uncle who was a highly prominent hedge fund manager. On her own volition, she arranged for Woodriff to interview with the president of the firm.

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I said, “I will leave you with one bit of parting advice. You are too old. You’re killing your own business. Get out.” He said, “I think you are right.” How did you think he was killing the business? Like any entrepreneur who starts a business, he was holding on too tight. They have been doing proprietary trading for 25 years and have never had a losing year. Despite that track record, they have missed the entire growth in asset management. They have had no hedge fund business through the entire hedge fund era. He was getting too old to take risks, and he admitted it himself. In the end, I agreed to become a managing member of First New York Securities.

Site Reliability Engineering: How Google Runs Production Systems
by Betsy Beyer , Chris Jones , Jennifer Petoff and Niall Richard Murphy
Published 15 Apr 2016

This industry is characterized by a relentless focus on safety, because the extremes of temperature and pressure demands of the process pose a high level of danger to workers on a daily basis. John Li is currently a Site Reliability Engineer at Google. John previously worked as a systems administrator and software developer at a proprietary trading company in the finance industry. Reliability issues in the financial sector are taken quite seriously because they can lead to serious fiscal consequences. Dan Sheridan is a Site Reliability Engineer at Google. Before joining the company, he worked as a safety consultant in the civil nuclear industry in the UK.

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The nuclear Navy was also concerned that automation and computers move so rapidly that they are all too capable of committing a large, irreparable mistake. When you are dealing with nuclear reactors, a slow and steady methodical approach is more important than accomplishing a task quickly. According to John Li, the proprietary trading industry has become increasingly cautious in its application of automation in recent years. Experience has shown that incorrectly configured automation can inflict significant damage and incur a great deal of financial loss in a very short period of time. For example, in 2012 Knight Capital Group encountered a “software glitch” that led to a loss of $440M in just a few hours.7 Similarly, in 2010 the US stock market experienced a Flash Crash that was ultimately blamed on a rogue trader attempting to manipulate the market with automated means.

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These industries regularly conduct controlled experiments to make sure that a given change yields the expected result at a statistically significant level and that nothing unexpected occurs. Changes are only implemented when data yielded by the experiment supports the decision. Finally, some industries, like proprietary trading, divide decision making to better manage risk. According to John Li, this industry features an enforcement team separate from the traders to ensure that undue risks aren’t taken in pursuit of achieving a profit. The enforcement team is responsible for monitoring events on the floor and halting trading if events spin out of hand.

Valuation: Measuring and Managing the Value of Companies
by Tim Koller , McKinsey , Company Inc. , Marc Goedhart , David Wessels , Barbara Schwimmer and Franziska Manoury
Published 16 Aug 2015

Therefore, it is all the more important for anyone valuing a bank to understand the business activities undertaken by banks, the ways in which banks create value, and the drivers of that value creation. Universal banks may engage in any or all of a wide variety of business activities, including lending and borrowing, underwriting and placement of securities, payment services, asset management, proprietary trading, and brokerage. For the purpose of financial analysis and valuation, we group these activities according to the three types of income they generate for a bank: net interest income, fee and commission income, and trading income. “Other income” forms a fourth and generally smaller residual category of income from activities unrelated to the main banking businesses. 

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For investment banks (such as Morgan Stanley) and for universal banks with large investment banking activities (among them HSBC, Bank of America, and Deutsche Bank), commission and fee income makes up around half of total net revenues. Fee income is usually easier to understand than net interest income, as it is independent of financing. However, some forms of fee income are highly cyclical; examples include fees from underwriting and transaction advisory services. Trading Income Over the past 30 years, proprietary trading emerged as a third main category of income for the banking sector as a whole. This can involve not only a wide variety of instruments traded on exchanges and over the counter, such as equity stocks, bonds, and foreign exchange, but also more exotic products, such as credit default swaps and asset-backed debt obligations, traded mostly over the counter. 760 BANKS Trading profits tend to be highly volatile: gains made over several years may be wiped out by large losses in a single year, as the credit crisis painfully illustrated.

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This can involve not only a wide variety of instruments traded on exchanges and over the counter, such as equity stocks, bonds, and foreign exchange, but also more exotic products, such as credit default swaps and asset-backed debt obligations, traded mostly over the counter. 760 BANKS Trading profits tend to be highly volatile: gains made over several years may be wiped out by large losses in a single year, as the credit crisis painfully illustrated. These activities have also attracted considerable attention in the wake of the crisis. In 2010, the United States adopted legislation preventing banks from engaging in proprietary trading for their own profit.3 This resulted in steeply lower overall trading income, as the law permits only trading related to serving the bank’s customers. Similar restrictions were adopted in Europe, and though they have not yet been enforced there, trading income for European banks has sharply declined since 2008.

What's Next?: Unconventional Wisdom on the Future of the World Economy
by David Hale and Lyric Hughes Hale
Published 23 May 2011

Compiling instructions that are detailed enough to be truly useful would be expensive for the firms and would require substantial disclosure of proprietary information. Regardless, any such unwinding process is apt to be very complicated as counterparties seek to protect their own interests. Another key battle was fought over the Volcker Rule. Named for the former Fed chairman’s crusade, the rule bars banks from proprietary trading and from directly sponsoring or investing in private equity or hedge funds. Initially, banks worried that this would hurt their profits, but the final version is riddled with exemptions that will allow most to continue with some minor reshuffling. Some parts of Dodd-Frank are benign, even favorable.

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PRODUCTION SHARING AGREEMENT: An arrangement between a government and a resource production company (or group of companies) that specifies what percentage of production the government is allowed to keep for its own use. PROPORTIONAL REPRESENTATION: A voting system that aims to secure a close match between the percentage of votes that groups of candidates obtain in elections and the percentage of seats they receive. PROPRIETARY TRADING: When a bank, brokerage, or other financial institution trades on its own account rather than on behalf of a customer. Often done for speculative purposes. PUBLIC SECTOR BORROWING REQUIREMENT: A term used in the United Kingdom to describe a government’s budget deficit in a given fiscal year.

The Everything Store: Jeff Bezos and the Age of Amazon
by Brad Stone
Published 14 Oct 2013

The broader financial community knew very little about D. E. Shaw, and its polymath founder wanted to keep it that way. The firm preferred operating far below the radar, deploying private capital from wealthy investors such as billionaire financier Donald Sussman and the Tisch family, and keeping its proprietary trading algorithms out of competitors’ hands. Shaw felt strongly that if DESCO was going to be a firm that pioneered new approaches to investing, the only way to maintain its lead was to keep its insights secret and avoid teaching competitors how to think about these new computer-guided frontiers. David Shaw came of age in the dawning era of powerful new supercomputers.

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So in 1994, when the opportunity of the Internet began to reveal itself to the few people watching closely, Shaw felt that his company was uniquely positioned to exploit it. And the person he anointed to spearhead the effort was Jeff Bezos. D. E. Shaw was ideally situated to take advantage of the Internet. Most Shaw employees had, instead of proprietary trading terminals, Sun workstations with Internet access, and they utilized early Internet tools like Gopher, Usenet, e-mail, and Mosaic, one of the first Web browsers. To write documents, they used an academic formatting tool called LaTeX, though Bezos refused to touch the program, claiming it was unnecessarily complicated.

Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann
Published 9 Sep 2019

Mack made it clear that Cruz, who had the title of president, was the person he had in mind to become his successor as chief executive. She was directly in charge of the part of Morgan Stanley that was responsible for managing risk on the trading desk. In late 2007 Morgan Stanley reported a $9.2 billion loss on a single trade—what Michael Lewis, in The Big Short, called “the single greatest proprietary trading loss in Wall Street history.” Derivatives may have been designed by mathematicians, physicists, and economists, but they were bought and sold by people like Howie Hubler, a blustery former college football player who was Morgan Stanley’s number one trader at the time: his team generated a billion dollars in profits in 2006.

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One former Morgan Stanley executive: Author’s interview with Anson Beard. Do we buy it, or do we sell it?: Author’s interview with Richard Bookstaber. “A key driver”: Patricia Beard, Blue Blood and Mutiny, 335. Mack remembers calling Timothy Geithner: Author’s interview with John Mack. “the single greatest proprietary trading loss”: Michael Lewis, The Big Short: Inside the Doomsday Machine, W. W. Norton, 215. Morgan Stanley had $178 billion in readily available capital: Books with useful material about Morgan Stanley during the financial crisis include Henry M. Paulson, Jr., On the Brink: Inside the Race to Stop the Collapse of the Global Financial System, Business Plus, 2010; Andrew Ross Sorkin: Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves, Penguin, 2010; and The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, Public Affairs, 2011.

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

In 2010, five big US banks controlled over 96 per cent of the derivative contracts in place.26 In the UK, ten financial institutions accounted for 85 per cent of over-the-counter derivatives turnover in 2016, and 77 per cent of foreign exchange turnover.27 Only the biggest banks can take the risk of large-scale writing and trading in derivatives, since they need a comfortable cushion of equity between the value of their assets and liabilities to stay solvent if asset prices fall. Only a few banks worldwide have grown big enough to sustain the high risks of proprietary trading -trading on their own account rather than for a client - and to be worthy of state-supported rescue if the risks prove too great. As a result, there are few banks with whom governments and large corporations can place new bond or share issues and expect subsequent market-making in those securities.

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Buyout funds performance vs S&P 50045 The fund management industry naturally argues that the returns it can make - seeking ‘alpha' - for clients justify the fees it charges. In an influential article,46 Joanne Hill, a Goldman Sachs partner, identifies conditions in which trying to achieve alpha need not be a zero-sum game -conveniently showing that investment banks' proprietary trading might have some social and economic value. But these conditions include an assumption that the market is divided into traders with short- or long-term horizons, who are pursuing alpha over different time periods and measuring it against different benchmarks. Without this artificial separation, alpha is indeed zero-sum - and turns into a negative-sum game once active managers deduct the extra fees they must charge for selecting stocks rather than just buying them in proportion to the relevant index.

The Making of Global Capitalism
by Leo Panitch and Sam Gindin
Published 8 Oct 2012

With Goldman Sachs’s net income surging to a record $13.4 billion for the year, while unemployment remained stuck at 10 percent, Obama’s frustration at the political costs of this—which were hardly mitigated by Goldman’s promise to reduce its annual bonus pool from $22 billion to $16 billion, and to donate $500 million to charities—led the president to propose two new measures in January 2010. One was a “Financial Crisis Responsibility Fee” to be paid by the largest banks; the other was to prohibit “proprietary trading” by deposit-taking banks (i.e. using their own capital to speculate as well as operate their own hedge funds)—a reform prominently associated with Volcker.75 Expressing his irritation over “the activities of lobbyists on behalf of those institutions” against such measures, Obama proclaimed that he “did not run for office to be helping out a bunch of fat cat bankers”; and he warned them that now the banks were “back on their feet we expect an extraordinary commitment from them to help rebuild our economy.”76 This served to present the minor reforms he was advancing in a way that led to misleading headlines such as “Obama Declares War on Wall Street” and “Banks Face Revolutionary Reform.”

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It also obscured the fact that the Fed and the Treasury shared a distinct lack of enthusiasm for even such modest proposals because of what they saw as their problematic implications for a highly integrated financial system: the responsibility fee could further limit lending by banks and complicate the conduct of monetary policy. And they recognized that isolating banks’ own proprietary trading would be very difficult, since this practice was so closely related to the trades in stocks, bonds, and derivatives they carried out for their clients. Indeed, the integration of commercial and investment banking on a global scale now made any return to the New Deal type of regulation virtually impossible.

…

Since the Oversight Council could also place other financial firms under the Fed’s authority, its potential regulatory and firefighting range was considerably expanded. The higher capital adequacy requirements were carefully constructed so as not to undercut the competitive advantages enjoyed by large financial firms. The hype about Dodd-Frank’s prohibition of proprietary trading (“the Volcker rule”) was largely negated by the numerous exceptions it specified, and in effect left it to the Fed to impose greater capital requirements and some broadly defined limits on these activities. Dodd-Frank allowed the Federal Reserve to preserve its key interventionist tools, as well as the room to develop new ones.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy
by Christopher Leonard
Published 11 Jan 2022

The program was operated out of a surprisingly small room located at one corner of the trading floor, where the Fed traders bought and sold things in order to control the money supply. At an appointed time, sometimes twice a week, a Fed trader went into the room and closed the door behind them. They sat at a terminal accessing the Fed’s proprietary trading system, called FedTrade. The Fed had used this system for decades, almost daily, to buy and sell short-term securities from the most exclusive group of financial institutions in the world. These were the roughly two dozen “primary dealers” that had the special privilege of doing business directly with the Fed.

…

Federal Reserve System; the Fed), 4, 5, 44, 47–48 balance sheet of, 102, 138, 147, 211, 227, 231, 236, 256, 257, 290–91, 301–2, 343, 349 board of governors of, 48, 120, 125, 127–29, 230 charter of, 48 creation of, 9, 47, 75, 277 criticisms of, 225, 257, 286 data errors in decisions by, 61 Eccles Building offices of, 21–22, 31, 56, 69, 71, 125, 241, 265–66 economists in, 131–32, 136, 223 emergency powers of, 277 financial footprint of, 277 lack of accountability of, 75, 78 “lessons learned” sessions at, 286 long-term thinking and, 303 movement to audit, 225, 286 politics of, 16–19 proprietary trading system of, 115 public discussion about, 257 public image of, 78, 286 regional banks in, 5, 48 role in economy and policy making, 15, 75, 114–16, 120–21, 277, 291 see also Federal Open Market Committee Federal Reserve Act, 249 Federal Reserve Bank of Chicago, 65–66 Federal Reserve Bank of Kansas City, 57, 67, 98, 140 Hoenig at, 3, 5, 44, 48–51, 53, 55, 58–59, 63, 67, 201, 203 Hoenig made president of, 5, 67–68 Hoenig’s retirement from, 34, 120, 200, 201 Jackson Hole symposium of, 25, 27, 28, 132–34, 136 Penn Square and, 64, 65 Federal Reserve Bank of New York, 23, 113–14, 118, 241–42, 246, 263, 272, 348, 349 coronavirus and, 266 global money markets and, 242 Salomon Brothers and, 157–61 standing directive at, 255 Federal Reserve notes, 4 Fed Funds rate, 247, 250, 255, 256 defined, 345 Fed Put, 237, 257, 272, 279 defined, 345–46 Fedspeak, 77–78, 81, 101, 133 FedTrade, 115 Feldstein, Martin, 133 Feltner, John, 188–91, 196–99, 293–96 Feltner, Nina, 190, 199, 293–95 financial crashes, 19, 23, 32, 33, 345 see also bank failures; Global Financial Crisis; stock market crashes Financial Times, 264 fiscal cliff, 136 fiscal policy, 79 defined, 346 monetary policy and, 78–79, 346, 347 Fisher, Richard, 12, 17, 27, 30–31, 111, 112, 128, 130–31, 140, 182, 226 Fitts, Catherine Austin, 154, 156 Flynn, John, 214–16, 266 Florida real estate, 54–55, 86 Forbes, 193 Ford, Gerald, 67 Ford Motor Company, 270, 271, 281 Fort Madison, Iowa, 35–36 Fortune, 205 Fox Business, 133 Fox News, 109 fracking, 213–14, 216 Franklin Templeton Investments, 177 FRB/US model, 139 futures contracts, 252–53, 345, 346 futures market, 346 Galbraith, John Kenneth, 54, 86 GameStop, 300 gasoline prices, 17, 50, 54, 72, 73, 83, 84 GDP, 302 Geithner, Timothy, 23, 100, 207 General Motors, 270 George, Esther, 140 George Mason University, 257 Georgetown Preparatory School, 151–52 Germany, 68, 111, 218, 237 Gingrich, Newt, 80 Glass-Steagall Act, 80, 348 Global Capital Index, 210 global economy, 237 central banks in, 112, 139–40, 217–18, 232, 235, 237–38 Fed’s rearrangement of, 231–32 money markets in, 242 slowdown of, 234–36 Global Financial Crisis (GFC; financial crisis of 2008), 5–7, 10, 14, 23, 24, 25, 102, 118, 126, 174, 177, 180, 182, 204, 206, 210, 224, 254, 267, 277, 278, 280, 296, 302, 343, 349 banks’ power increased by, 202, 206 in Europe, 134–35 Fed’s role in, 20–21 Hoenig and, 18 as long crash, 305 quantitative easing during, 25, 101 globalization, 224 glossary, 343–52 Goldman Sachs, 115, 257, 275 gold prices, 235 gold standard, 9, 95–96 Gorsuch, Neil, 151 government debt, 135, 157 Great Depression, 17–18, 23, 49, 58, 64, 79, 89, 100, 202, 204, 228, 283, 286, 345, 348 Great Inflation of the 1970s, 53–56, 60–61, 65, 66, 82 Great Society, 80 Greece, 209 Greenspan, Alan, 22, 23, 67–69, 71–78, 81, 84–89, 92 in Congressional hearings, 75–78, 83, 86 consumer price inflation as focus of, 81–83, 87–89 Fedspeak of, 77–78, 81 Hoenig and, 82, 83, 87–88 reputation of, 76–77, 87, 93, 99 retirement of, 93 Greider, William, 47 Gruenberg, Martin, 203, 208 Guffey, Roger, 67 Guggenheim Investments, 262, 268, 282 Gutfreund, John, 161 Hanseatic League, 154 hawks, 16–19, 152 defined, 346 Hoenig as hawkish, 17, 18, 93, 94 hedge funds, 116–19, 202, 212, 224, 242, 257, 259, 291 basis risk trades and, 252–55, 265 Dune Capital, 276 leverage ratio of, 257 relative-value, 253–54 repo market and, 245, 247, 251–55 risk parity, 265 Hefner, Robert A., 64 Hetu, Robert, 170, 171–74, 176, 178–80, 182, 191–92 Hinchey, Maurice, 78 History of the Federal Reserve, The (Meltzer), 60, 62 Hitt, Robert, 164, 167 Hoenig, Arlene, 36 Hoenig, Cynthia, 41, 44, 107–8, 301 Hoenig, Leo, 35–37, 41, 49 Hoenig, Thomas, 3–13, 15–22, 35–44, 53–55, 59–60, 62–63, 67–69, 80, 89, 91–99, 122, 140, 168, 201–11, 221, 229–31, 257–59, 301–3, 305 on allocative effects of zero percent interest rates, 19, 20, 27 Bankers’ disputes with, 49–50, 55, 58–59, 65 banks as viewed by, 43–44 Bernanke and, 15, 29, 93–94, 104 big bank breakup planned by (the Hoenig rule), 203–7, 209 career of, 5, 22, 34, 71, 305 coronavirus pandemic and, 301 early life of, 4–5, 35–36, 49 economics studies and views of, 5, 36–37, 41–42, 302 essays of, 301, 302, 305 Exchequer Club speech of, 205–6 in father’s business, 5, 35, 36, 49 at FDIC, 200, 201–11, 218–19, 230–31, 257 FOMC dissents of, 3–5, 8–13, 15, 18, 19, 24–25, 29, 32, 34, 75, 82, 84, 88, 104, 107–9, 112, 120, 301 FOMC relationships of, 11–12, 15 as FOMC sitting member, 71–72, 81 as FOMC voting member, 22, 74, 75, 81, 87, 88, 92, 102, 104, 105 framed German currency given to, 68, 69 Global Capital Index created by, 210 Global Financial Crisis and, 18 Greenspan and, 82, 83, 87–88 as hawkish, 17, 18, 93, 94 housing bubble and, 89 inflation concerns of, 18, 19, 75 interest rates and, 85–86, 93–94, 104 at Iowa State, 5, 41–42 at Kansas City Fed, 3, 5, 44, 48–51, 53, 55, 58–59, 63, 67, 201, 203 Kansas City Fed presidency appointment, 5, 67–68 Kansas City Fed retirement of, 34, 120, 200, 201 long and variable lags as concern of, 62, 68, 82, 94–95 marriage of, 41 master’s thesis of, 42–43 as Mellonist, 17, 18 at Mercatus Center, 257, 301 monetary policy as viewed by, 62–63, 68, 82, 94–96 Penn Square and, 64, 65, 67 PhD dissertation of, 43 physical appearance of, 11 Powell compared with, 222 Powell’s meeting of, 200 predictions and warnings of, 19, 34, 200, 222, 258, 302 quantitative easing critiques of, 27–28, 31–33, 62, 112, 120 quantitative easing publicly condemned by, 29, 34 quantitative easing vote of, 3, 8–11, 18, 21, 32, 34, 105, 107–9, 112, 258, 280 reputation of, 18 rules-based philosophy of, 94–95 speeches of, 96–99, 202–3, 205–6, 302 Starbucks visited by, 258, 259 Trump administration and, 230 Vietnam service of, 5, 37–41, 49 Hogan, Larry, 282 Hoover, Herbert, 17–18 housing, 91, 92, 96, 99 bubble and crash in, 20, 23, 54, 89, 92, 104, 126, 174, 214, 248, 276 prices of, 92, 93, 100 see also mortgages; real estate Hubbard, Glenn, 287 Huffington Post, 110–11 Hurley, Cornelius, 209 hyperinflation, 68, 111–12, 225 IMF, 85 Indianapolis, Ind., 188–90, 197–98 IndyMac, 276 inflation, 17, 50, 51, 53, 54, 56, 59, 60, 62, 68, 80–82, 86, 93, 95, 111–13, 138–39, 232 absence of, 223–24 of asset prices, 50, 68–69, 81–84, 87, 95, 119, 148, 182, 224, 295, 297, 305 Bernanke and, 93 coronavirus and, 297 cost push theory of, 61, 344, 345 demand pull theory of, 61–62, 344–45 Fed’s encouraging or tolerating, 56 Fed’s focus on consumer prices, 81–83, 87–89 Hoenig’s concerns about, 18, 19, 75 hyperinflation, 68, 111–12, 225 interest rates and, 17, 22, 62 lack of, 237–38 monetary policy neglect in, 61–62 in 1970s, 53–56, 60–61, 65, 66, 82 predictions of, 223, 224 quantitative easing and, 33, 112–13, 119–20 Volcker and, 22, 56–57, 67, 68 Volcker’s “cousins” formulation of, 81, 95 ZIRP and, 138–39 insurance companies, 119, 143, 173, 175, 177, 211 interest rates, 7, 9, 17, 21, 43, 59, 117, 133, 148, 181–82, 211, 347 asset values and, 300 on corporate debt, 279 defined, 346–47 economy and, 7 Hoenig and, 85–86, 93–94, 104 inflation and, 17, 22, 62 negative-interest-rate debt, 217–18, 347–48, 351 quantitative easing and, 116–19, 133, 137–39 risky loans and, 19–20 and rolling over corporate debt, 155 stock market and, 84–85 Volcker and, 22, 56–57, 72 interest rates, Fed’s manipulation of, 7, 50, 55–56, 62, 63, 72, 74–75, 81–88, 91–96, 99, 104–5, 114–15, 126–28, 227, 228, 231–34, 236–38, 242, 244, 246, 247, 348 Fed Funds rate, 247, 250, 255, 256, 345 repo market and, 249 standing directive and, 255 see also zero bound; ZIRP Internet, 72, 84, 87 IOER (interest on excess reserves) rate, 249 Iowa, 42 Fort Madison, 35–36 Iowa State University, 5, 41–42 Italy, 262 Jackson, Andrew, 44–45 Jackson Hole symposium, 25, 27, 28, 132–34, 136 Jansen, Tom, 164–67, 169 Japan, 24 Jekyll Island, 47 Jennings, Bill “Beep,” 63, 64 jobs, see unemployment; work, workers Johnson, Lyndon, 80 Jones, Kathy A., 218 JPMorgan Chase, 66, 115, 191, 210, 244, 269, 271 junk bonds, 72, 143, 146, 156, 164, 176–78, 259, 271, 272, 281, 286, 299 defined, 347 Kansas, 55, 206 Kansas City Fed, see Federal Reserve Bank of Kansas City Kavanaugh, Brett, 151 Kelley, Kathleen, 35, 38 Keynes, John Maynard, 81, 347 Keynesian economics, 81, 100–101, 347 KFC, 193 KKR, 180 Kocherlakota, Narayana, 130 labor unions, 14, 61, 79, 110, 166, 194, 196–98, 344, 348 Rexnord and, 190, 194–96 Lacker, Jeffrey, 27, 30, 31, 128, 141 Lehman Brothers, 5, 6, 8, 23 Lemann, Nicholas, 81 leverage, 193n, 257, 262–63 deleveraging events, 247 leveraging up, 252, 253 leveraged loans, 142, 149, 155, 156, 162, 168, 170, 172–75, 178–80, 182, 199, 270–72, 277, 279, 281, 298, 305 collateralized loan obligation, see CLO coronavirus relief and, 288 defined, 347 downgrading of, 271 with covenants stripped out (Cov-lite), 179–81 variable rates in, 177 Liang, Nellie, 148 liberals, 16, 109–11, 257, 346 see also Democratic Party libertarians, 225 Liesman, Steve, 145 liquidity mismatch, 224–25 living wills, bank, 208–9, 269 LMR Partners, 254 loans, 27, 43, 53, 55, 88, 133 assets and, 49–51, 57–60 business development corporations and, 181 collateralized loan obligation, see CLO consumer, 43, 56 defaults on, 271, 279 demand for, 57, 61–62, 212 home (mortgages), 23, 56, 96, 97, 99–100, 102–3, 137–38, 147, 149 interest rates on, see interest rates leveraged, see leveraged loans loan-shark rates in, 251 overnight, 114, 238, 242, 243, 247–52, 254–57 by Penn Square, 63–65 repo, 243–58, 264, 265 risky, 14, 19–20, 27, 33, 49–51, 63, 91, 97, 105, 146–47 securitization and, 63 short-term corporate, 266 to small businesses, 279 zero bound and, 19–20 lobbyists, 206–7 Lockhart, Dennis, 130, 140 Logan, Lorie, 241–43, 245–47, 249, 250, 255, 263 Long-Term Capital Management, 111 LSAP (large-scale asset purchase), 132 Macy’s, 298 Maffei, Greg, 86 Main Street Lending Program, 279, 286–87, 297 Mallaby, Sebastian, 83, 87 Man Who Knew, The (Mallaby), 83, 87 McConnell, Mitch, 201–2, 276–77, 283 McDonald’s, 193 McKeon, Jon, 38, 39, 41, 206 McKinney, Stewart, 66–67 McKinsey Global Institute, 211, 216 McWilliams, Jelena, 230 media, 108–12, 144–45 Mellon, Andrew, 17–18 Meltzer, Allan, 60, 62 Mercatus Center, 257, 301 Mercury Asset Management Group, 157 Messonnier, Nancy, 262, 263 Mester, Loretta, 267–68 Mexico jobs moved to, 196–99 and search for yield, 216, 217 middle class, 295–96 Milwaukee Journal Sentinel, 191 Minerd, Scott, 262–63, 268, 269, 282 Mnuchin, Steven, 229, 282 career of, 275–76 coronavirus relief programs and, 273, 276–77, 283, 285–86, 299 Powell and, 275, 277–78, 299 Trump and, 275, 276 monetary base, 6, 102, 120 monetary policy, 9, 46, 56, 60, 88, 148 defined, 347 fiscal policy and, 78–79, 346, 347 Hoenig’s views on, 62–63, 68, 82, 94–96 inflation and, 61–62 quantitative easing’s role in, 127 short-term and long-term problems and, 62–63 Trump and, 233–34 money currencies, 45, 112, 217, 225, 350 Fed’s control of, 47 politics of, see politics of money value and quantity of, 4, 6, 46, 347 see also dollar money creation, 4, 6, 17, 19, 26, 27, 45, 46, 47, 50, 58, 60–63, 79–81, 84, 101–2, 113–16, 120–21, 170, 211, 223, 297, 305, 343, 348, 349 asset prices and, 224 deflation and, 223 quantitative easing and, 113, 115–16, 120–21, 177, 211 money markets, 242 monopolies, 348 Moody’s, 198, 271, 347 mortgage-backed securities, 214–16, 247, 254, 266, 268, 304, 349 mortgages, 23, 56, 96, 97, 99–100, 102–3, 137–38, 147, 149 Mozer, Paul, 158, 161 MSNBC, 109 mutual funds, 177 Nasdaq, 84, 86 National Bureau of Economic Research, 140 natural gas, 55 Navistar, 189, 295 Nebraska, 55 negative-interest-rate debt, 217–18, 347–48, 351 Nelson, Edward, 61 New Deal, 79–80, 204 defined, 348 New York Federal Reserve Bank, see Federal Reserve Bank of New York New York Times, 13, 14, 41, 86, 109, 218 Nixon, Richard, 41, 67 Nomura Securities International, 115 NPR (National Public Radio), 109, 120 Obama, Barack, 13–14, 100–101, 103, 108, 122, 126, 135, 159, 203, 204, 207, 229 Occupy Wall Street, 286 oil, 49–51, 55, 57, 61, 63, 64, 97, 117, 118, 235, 263, 345 embargo on, 344 fracking and, 213–14, 216 and search for yield, 213–14 Oklahoma, 55 OneWest, 276 Only Game in Town, The (El-Erian), 231–32 OPEC, 344 open market operations, 247–48, 349 defined, 348 Operation Twist, 127 defined, 348–49 Paul, Ron, 225 Paulson, Hank, 23 Paycheck Protection Program (PPP), 284, 285 Pelley, Scott, 112 Pelosi, Nancy, 276, 283 Pence, Mike, 197 Penn Square Bank, 63–65, 67–69, 97, 98 pension funds, 119, 143, 173, 175, 177, 211, 271 Pentagon Papers, 41 Pets.com, 86–87 Pianalto, Sandra, 130, 140 Plosser, Charles, 12, 27, 30, 31, 112 Poland, 216, 217 politics, 16, 80, 202 see also Democratic Party; Republican Party politics of money, 9, 11, 46, 78 see also doves; hawks Poole, William, 85, 86 Popp, John, 174–76 populists, 46, 47 Portnoy, David, 288–90 Potter, Simon, 249–50 Powell, Jerome “Jay,” 121–22, 125–29, 132, 151–63, 199–200, 221–22, 224–29, 231–34, 236–38, 244, 246, 247, 250, 255, 256, 258, 275, 300, 305 career of, 125–26, 152–53, 163, 169, 272, 290 at Carlyle Group, 126, 161–63, 165–69, 185, 186, 229, 290 Catholic University speech of, 225–26 coronavirus crisis response and, 265, 267, 268, 272–73, 277–78, 280, 280n, 283, 290, 291, 296–97 at Dillon, Read & Co., 153–56, 161, 270 Duke and, 125, 127–28, 142–43 early life of, 126, 151–52 economics conference speech of, 256 Fed’s image and, 286 golfing of, 167 growth of influence of, 222 Hoenig compared with, 222 Hoenig’s meeting of, 200 listening tours of, 286, 290 Mnuchin and, 275, 277–78, 299 news conference of, 236–37 normalization process and, 221, 224–25, 233, 234, 236–37, 243, 245, 256 physical appearance of, 156 political alliances of, 233 political standing of, 298 as pragmatist, 153 quantitative easing and, 121–22, 127–29, 132, 141–44, 148–49, 221–22, 236 reversal of opinion on quantitative easing and ZIRP (Powell Pivot), 225–27, 236–37 Rexnord and, 163–70, 185, 186, 199 Salomon Brothers and, 159–61 speeches of, 225–26, 256, 290 at Treasury Department, 126, 156–61, 290 Trump and, 229, 233–34 warning of, 272 wealth of, 169 Williams and, 246 Powell, Patricia, 151 Power and the Independence of the Federal Reserve, The (Conti-Brown), 132 prices of assets, see asset prices and value controls on, 62 deflation of, 96n, 223–24, 237 of gasoline, 17, 50, 54, 72, 73, 83, 84 of gold, 235 of housing, 92, 93, 100 inflation of, see inflation spread in, 268–69 of stocks, 84, 119, 131, 212, 235 primary dealer(s), 26, 101, 115–16, 285, 350 defined, 349 Salomon Brothers as, 159, 160 private equity firms, 97, 116, 122, 149, 156, 161–64, 166, 168–70, 174, 178–82, 187, 202, 221, 291 Apollo Management, 168–70, 173–74, 180, 186, 191 Carlyle Group, 126, 161–63, 165–69, 174, 178–80, 182, 185, 186 put contracts, 345–46 Fed Put, 237, 257, 272, 279, 345–46 Qualcomm, 86 quantitative easing (QE), 8–11, 114–15, 126–49, 154, 170, 173, 182, 225, 247, 249, 251, 252, 262, 292, 295, 302, 304n, 305, 344, 350–52 allocative effect of, 27, 28 asset price inflation and, 119, 132, 148, 182, 300 basic mechanics and goals of, 26 Beck on, 110 Bernanke and, 10, 25–34, 105, 112–13, 118n, 121, 126–30, 132–34, 136, 140–46, 148, 182, 247 bonds in, 101, 110, 139, 227, 231–34, 236, 267, 280 coronavirus pandemic and, 267, 279–80, 297 defined, 349 developing nations and, 216–17 difficulty of undoing, 32–33, 128, 130, 140, 143, 258 Duke and, 127–28, 141–44 end of, 147–48, 227 European Central Bank’s version of, 235 excess bank reserves and, 248 Fed’s research on, 30 Feldstein on, 133 in financial crisis of 2008, 25, 101 FOMC debates on, 9, 10, 16, 27–34, 112, 121, 126–30, 132, 134, 137, 140, 142, 143 FOMC presentation on, 136–39 FOMC voting on, 3, 8–11, 18, 21, 29, 32–34, 105, 107–9, 112, 113, 134, 136–37, 141, 148 forecasting errors and, 138–40 growth-boosting channels of, 148 Hoenig’s critiques of, 27–28, 31–33, 62, 112, 120 Hoenig’s predictions about, 34, 200 Hoenig’s public condemnation of, 29, 34 Hoenig’s vote on, 3, 8–11, 18, 21, 32, 34, 105, 107–9, 112, 258, 280 inflation and, 33, 112–13, 119–20 interest rates and, 116–19, 133, 137–39 job creation and, 119, 139, 182 media and, 108–12, 144–45 money supply and, 113, 115–16, 120–21, 177, 211 negative-interest-rate bonds and, 218 normalization (reversal) of, 221, 223–25, 227–29, 231, 233–37, 243, 245, 249, 256 as normal tool of monetary policy, 127 NQE (non-QE) program, 256–57 open-ended program of, 136, 141 open market operations and, 247–48 Operation Twist, 127, 348–49 policy options in, 128–29, 132, 136, 141 political backlash against, 144 Powell and, 121–22, 127–29, 132, 141–44, 148–49, 221–22, 236 Powell’s reversal of opinion on (Powell Pivot), 225–27, 236–37 public perceptions of, 119–20, 136 risk seesaw and, 145–46 risks of, 32–33, 130, 132, 143, 226 risky loans and, 27, 33 second round of, 32, 114–15, 118n, 144, 173, 349 stock prices and, 119, 212 Taper Tantrum and, 145–47, 217 unemployment and, 121 Yellen and, 130 quantitative tightening, 233, 237 defined, 349–50 Quarles, Randal, 229, 230, 280n Reagan, Ronald, 80, 156, 158–59 real estate, 50, 51, 55, 91, 92, 262 in Florida, 54–55, 86 quantitative easing and, 117–19 and search for yield, 214–16 see also housing real estate investment trusts (REITs), 147 recessions, 8, 22, 24, 50, 56, 60, 72, 73, 75, 80, 81, 136, 186, 225, 236, 302, 347 reconciliation, 158–59 Reddy, Sudeep, 34 Reifschneider, David, 148 relative-value funds, 253–54 repo market, 243–58, 264, 265 Republican Party, 21, 80, 101, 103, 135, 197, 201, 203, 233, 276, 304 Tea Party movement in, 14, 103, 109, 135, 206, 286 see also conservatives reserve accounts, 26 defined, 350 reserve currency, 350 revolving credit facility, 170 Rexnord, 163–70, 171–73, 176–79, 183, 185–99, 281 Adams at, 186–88, 191, 192, 194, 195, 198 Apollo Management and, 168–70, 172, 173, 186, 191 Carlyle Group and, 163, 165–69, 185, 186 closure of factory and move of production to Mexico, 196–99 Feltner at, 188–91, 196–99, 293, 295 labor unions and, 190, 194–96 Powell and, 163–70, 185, 186, 199 Rexnord Business System (RBS), 186–87 SCOFR plan of, 195–96, 198, 199 stock buyback of, 193–94 ZIRP and, 187–88 Rickards, James, 111 Riksbank, 218 risk parity funds, 265 risk seesaw, 145–46, 304, 305 Robinhood, 289, 290, 300 Roblox, 297–98 Romney, Mitt, 133 Roosevelt, Franklin Delano, 79–80, 100, 204 Rubenstein, David, 161 Russia, 85, 111, 238 Sahm, Claudia, 267, 286 Salomon Brothers, 157–61 SARS epidemic, 261, 263 Saudi Arabia, 263 Saxton, Jim, 76, 78 Secondary Market Corporate Credit Facility (SMCCF), 281 Secrets of the Temple (Greider), 47 Securities and Exchange Commission (SEC), 155, 159, 160, 162, 175, 215, 348 securitization, 63 September 11 attacks, 88, 91 S.

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money
by Steven Drobny
Published 18 Mar 2010

She thinks she might be well-suited to run a real money fund because of her natural long-term investment horizon, and she says real money players should pay much more attention to cutting off their downside tail risk. Her hardscrabble Midwestern American roots have given the Commodity Hedger as much general business acumen as trading skill, enabling her to launch her own proprietary trading group inside of Cargill, one of the most powerful players in global commodity markets, and more recently her own hedge fund. She has had about 20 different addresses in the last 30 years, and her extreme versatility and flexibility are partly what allow her to express trades in a multitude of ways.

…

At other times my trading can be more reactionary to what’s going on in the market. I try to react in a disciplined way to what’s happening in the market on a given day—adjusting positions as the odds change. How did you learn discipline? Losing money definitely helped. Also, I changed jobs to become a trader at a proprietary trading firm, which had a very disciplined risk management system that was drilled into us. This new trading role meant a fixed capital allocation with clear stop-loss levels on every trade, as well as a predefined universe of the names we were allowed to trade. It was a very good place for someone new to the business to learn.

Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase
by Duff McDonald
Published 5 Oct 2009

This, in turn, meant that the risk-return trade-off on the unit’s big bets was heading in the wrong direction. The arbitrage group’s members had also done a surprisingly poor job of ingratiating themselves with their new bosses. In his insightful indictment of financial innovation, A Demon of Our Own Design, Richard Bookstaber recalls a series of meetings in which the heads of Salomon’s proprietary trading—Rob Stavis, Costas Kaplanis, and Sugar Myojin—were tasked with making Weill, Dimon, and Travelers’ CFO Heidi Miller comfortable with their strategies and positions. At the end of a meeting in the anteroom between Weill and Dimon’s offices on the thirty-ninth floor of the Greenwich Street building, Stavis for some reason took it upon himself to demand that everyone—Sandy Weill and Jamie Dimon included—return the presentation books he’d used, given the proprietary nature of the information within.

…

JPMorgan Chase had a reputation before he arrived for a tendency to get overexposed to Wall Street fads, such as telecom loans and technology private equity. He was determined not to repeat these mistakes by diving into the subprime and securitized debt fads. He remained vigilant about improving what he referred to as the “productivity” of the firm’s risk capital—more bang returned for every buck risked. He had already scaled back the firm’s proprietary trading activities in 2005, and he wasn’t about to reverse course and pile on risky assets less than a year later. “Everyone was trying to grow in products we didn’t want to grow in,” he later told a reporter. “So we let them have it.” Included among those products were so-called negative amortization and option adjustable-rate mortgages, which enticed undercapitalized home buyers to take on huge debts.

The End of Alchemy: Money, Banking and the Future of the Global Economy
by Mervyn King
Published 3 Mar 2016

The largest banks have become smaller; the balance sheet of Goldman Sachs in 2015 was around one quarter smaller than in 2007. Investment banking is not as profitable now as it was when asset prices were rising in the wake of falling real interest rates. Many banks have cut back on the size of their investment banking operations and some, such as Citigroup and Bank of America, have sold their proprietary trading desks, which bought and sold investments on their own account, and turned themselves back into more traditional commercial banks. Is all this enough? I fear not, and for one simple reason. Radical uncertainty means that sentiment towards financial firms can change so quickly that regulations which appear too burdensome one moment seem too lenient the next.

…

He closed the Northern Liberator in 1840. 4 Blakey (1839), pp. 58–9. 5 In today’s money roughly equivalent to £5000. 6 In the UK, ring-fencing followed the recommendations of the Independent Commission on Banking chaired by Sir John Vickers, which reported in 2011, and in the US the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 included the so-called Volcker rule, which outlawed proprietary trading for their own account by banks. 7 Basel Committee on Banking Supervision, Regulatory Consistency Assessment Program Analysis of Risk-weighted Assets for Credit Risk in the Banking Book, July 2013. 8 Bingham (2010) relates the story of a case in Britain in which neither the lawyers nor the judges realised that the relevant regulations applying to the case at hand had changed between the date of the alleged offence and the date of the hearing because there was no easy way of finding out. 9 Mansfield (1761). 10 Haldane (2013). 11 Information supplied by the Bank of England. 12 A comprehensive survey of proposals to end fractional reserve banking is Lainà (2015). 13 A six-page memorandum describing the plan was circulated confidentially by Henry Simons to about forty individuals in 1933. 14 Fisher (1936a, 1936b), Friedman (1960), Minsky (1994), Tobin (1985). 15 Keynes was nevertheless scathing about bankers.

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox
Published 29 May 2009

When Eugene Fama and Kenneth French published their research on the outperformance of value stocks, Sinquefield and Booth (who in 2008 gave $300 million to the Chicago Business School, which was renamed in his honor) signed them up as advisers and launched a value fund that was hard to distinguish from the value funds run by efficient market nonbelievers. The most fascinating case was that of Robert Merton and Myron Scholes. In the 1980s, a spectacularly successful proprietary trading operation emerged at the bond brokerage Salomon Brothers. At its head was Chicago MBA John Meriwether, who assembled a team of traders and quants led by one of the best Ph.D. students Merton ever taught, Eric Rosenfeld. The approach was similar to Ed Thorp’s, but with bonds instead of stocks and a lot more swashbuckling.

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Listen to one of the former partners, or read the two fascinating books that chronicle the fund’s downfall, Roger Lowenstein’s When Genius Failed and Nicholas Dunbar’s Inventing Money, and one comes away shaking one’s head at the many hazards of hubris, of wealth, of leverage, of trusting one’s bankers, of trying to make decisions in a partnership.21 The hedge fund’s fall might be evidence that markets are efficient: Its market-beating returns were the result of taking excessive risks. Or it might be evidence that they are not: LTCM failed because security prices diverged dramatically from their fundamental values. The hedge fund had grown out of the proprietary trading desk at Salomon Brothers, and signed up Robert Merton and Myron Scholes as partners. It followed the approach of quantitative pioneer Ed Thorp: Find two securities that by all rights ought to be traveling in the same direction but weren’t, and bet that they would converge. A longtime favorite of LTCM chief John Meriwether was the off-the-run treasury trade.

Mastering Private Equity
by Zeisberger, Claudia,Prahl, Michael,White, Bowen , Michael Prahl and Bowen White
Published 15 Jun 2017

Distressed Debt Investing Distressed debt funds acquire stakes in the debt obligations of companies in financial distress to generate returns either through the appreciation of the debt or an eventual restructuring of the target company. When acquiring short-term stakes or “trading” positions to generate returns from price appreciation, these funds compete head-on with hedge funds or the proprietary trading desks of banks, looking to benefit in the short term from mispriced assets. Yet, most distressed debt funds aim to acquire a significant position across the target company’s debt structure to influence or drive the restructuring process. Some funds combine expertise in debt investment and restructuring with turnaround and operational capabilities to execute a “loan-to-own” strategy and aim to gain equity control of a business.

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Bowen has spent his career working in and conducting research on the global alternative asset management industry. In the New York hedge fund industry, he researched topics from statistical arbitrage investment strategies in commodities markets to macroeconomic trends and global hedge fund performance. Having worked for both a proprietary trading firm and a fund of funds, he has seen first-hand the challenges faced by investors and allocators of capital to the hedge fund industry. An INSEAD alumnus, Bowen has also advised on a range of VC and growth equity fundraising opportunities across Southeast Asia. GLOSSARY Additional material to complement this book and connect it to the case book Private Equity in Action – Case Studies from Developed and Emerging Markets can be found on the companion website: www.masteringprivateequity.com Term Definition 100-day Plan A plan that outlines clearly the changes to be achieved by a company during the first three months post-investment. 500-day Plan Exit plan by a private equity (PE) firm to prepare the portfolio company for sale.

The Little Book of Hedge Funds
by Anthony Scaramucci
Published 30 Apr 2012

And Now for the Not-Quite-as-Successful By the mid-90s, it appeared that hedge funds had found the Shangri-La of investments. But just as they were about to meet the leprechaun and his pot of gold at the end of the rainbow, it happened—Long-Term Capital Management (LTCM) collapsed in 1998 and was later rescued by the federal government. Founded in 1994 by a proprietary trading legend, John Meriwether from Solomon Brothers; two Nobel Prize-winning economists, Robert C. Merton and Myron Scholes; and a slew of finance wizards, LTCM used an arbitrage strategy that exploited temporary changes in market behavior. By pair trading and betting on price convergence over a range of scenarios (we’ll discuss those strategies in Chapter 7), the LTCM band of brothers leveraged their $4 billion fund until it had a notional exposure of over $1 trillion dollars.

Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen
Published 4 Apr 2011

At Brevan Howard, the co-CEOs allowed me to take different roles, some outside the core hedge fund business, and recognized the value of this book for institutional investors. It helps that the book’s themes have little to do with Brevan Howard’s core approach of tactical rates trading based on fundamental macro-views with a focus on trade construction and risk management, so I will not be revealing any proprietary trade secrets. This book has been hugely influenced by my regular meetings in Oslo discussing the long-run investment strategy for Norway’s sovereign wealth fund. One outgrowth of those meetings has been even more inspirational—our trialogue with Knut Kjaer and Andrew Ang about diverse long-horizon investor topics.

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Value strategies worked especially well for stock selection in Japan and for equity country allocation. Other studies document the success of value strategies among emerging equity markets and among corporate bonds. Many fixed income arbitrage strategies employed in hedge funds and bank proprietary trading desks are based on mean-reverting spreads or related value anchors. Statistical arbitrage in equity markets—pairs trading and more complex variants—is also based on relative value (i.e., mean reversion in the pricing relationship between two assets). The profitability of such “arbitrage” (really: relative value trading) strategies waned significantly in the past decade as the technologies to exploit them became widely available.

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In this chapter, I turn to dynamic trading strategies and forecasting models that have a shorter horizon (one week, month, or quarter). I first describe the generics—model types, assets traded, indicators—and then comment on possible improvements and pitfalls for the systematic trading style. I keep this chapter brief so as to retain some of my proprietary trade secrets, but Chapters 8 through 10 review several publicly known market-timing indicators for equities, duration, and credit, while Chapters 12 through 15 review four popular dynamic trading strategies: equity value, foreign exchange carry, commodity momentum, and volatility selling. What types of models are used?

The Scandal of Money
by George Gilder
Published 23 Feb 2016

Deutsche Bank, Goldman Sachs, Morgan Stanley, UBS, Citibank, JPMorgan Chase, and the rest, eminent institutions all, are full of dazzling financial prestidigitators. But they are too big to fail and too dependent on government to succeed. Their horizons are too short to foster entrepreneurial wealth and growth. The bulk of financial profits now comes from “proprietary trading,” with a time horizon measured in minutes and weeks rather than years and decades. They impart liquidity but not learning. They are profitable because of a vast transfer of wealth away from workers and savers to bankers. These institutions insidiously thrive by serving government rather than entrepreneurs.

Wall Street: How It Works And for Whom
by Doug Henwood
Published 30 Aug 1998

At the end of 1993, the 20 largest banks had off-balance-sheet exposures equal to 39% of assets and 573% of their "core capital" (retained profits plus the proceeds of past stock sales), meaning that if all hell broke loose many would be legally insolvent. Additionally, many banks have extensive proprietary trading accounts (for their own accounts rather than clients'), in which they turn over foreign exchange, government bonds, and other fictitious claims; the 20 largest banks had trading accounts equal to 45% of assets and 749% of core capital (computed from Sheshunoff data reported in Schlesinger 1995).

…

Many of these activities are not only off balance sheets, they're off the mainland as well, in London or the Cayman Islands.^^ But the central banks would not allow all hell to break loose, meaning that a public safety net has been placed under a market no one really understands or can even accurately measure.^^ Fear-mongering aside, whatever the virtues of off-balance-sheet financing and proprietary trading, it has little in common with J.P. Morgan's "character" banking — making a loan based on a judgment of personal character rather than a balance sheet — or classic credit scrutiny. Often, banks are quick to syndicate loans — farm bits of a deal out to other banks — or to securitize them (to package a bunch of similar loans and sell them as bonds on the open market).

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis
by Martin Wolf
Published 24 Nov 2015

The US introduced the Volcker rule, named after its promoter, Paul Volcker, redoubtable chairman of the Federal Reserve between 1979 and 1987: ‘The Rule generally prohibits a banking entity from engaging in proprietary trading or acquiring an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund.’16 The comprehensible aims of this rule are to reduce conflicts within firms between their own and their clients’ interests and to ensure that any form of implicit or explicit public subsidy is not employed in trading for their own account. The difficulty is that it is hard to distinguish proprietary trading from the essential service of market-making. The Rule was agreed in December 2013 and is due to go into effect only in April 2014.

Endless Money: The Moral Hazards of Socialism
by William Baker and Addison Wiggin
Published 2 Nov 2009

A town that has 100 traffic cops and no murder detectives probably won’t find any dead bodies, but its police force will be very busy and profitable. Evidence-Based Investing How else could one get the courage to lever up to five-to-one or even 30-to-1 as was the case in some investment banks and statistical arbitrage proprietary trading funds, without “proof ” that certain assets and liabilities would behave in correlation or within bands of normal distribution? One year before the equity market imploded due to the credit crisis, a class of hedge funds known as “statistical arbitrage” funds collapsed, foretelling the effect leverage was having on stability of the market.

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For years many feared a conflict between commercial banking and brokerage, but this separation was irrelevant in the current crisis, as proven by the better performance of institutions in Canada and other countries. No one objects that investment banks give away purportedly objective research that happens to compliment high-margin corporate finance activity and proprietary trading operations, a structural flaw that damages the competitiveness of those who would author reports on investments with an independent perspective. While these financial hazards have gained attention, the largest by far gets no recognition at all. The operation of a fiat currency encourages the accumulation of debt, which in turn pumps up the value of assets including stocks.

Tailspin: The People and Forces Behind America's Fifty-Year Fall--And Those Fighting to Reverse It
by Steven Brill
Published 28 May 2018

Here is the December 10, 2013, announcement of the rule: https://www.federalreserve.gov/​newsevents/​pressreleases/​bcreg20131210a.htm. The first draft: Proposed rule: https://www.federalregister.gov/​documents/​2011/​11/​07/​2011-27184/​prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with. Final rule: https://www.federalregister.gov/​documents/​2014/​01/​31/​2013-31511/​prohibitions-and-restrictions-on-proprietary-trading-and-certain-interests-in-and-relationships-with. meetings with lobbyists: Kimberly Krawiec, “Don’t ‘Screw Joe the Plummer’: The Sausage-Making of Financial Reform,” Arizona Law Review (2013), http://scholarship.law.duke.edu/​faculty_scholarship/2445/.

Trade Your Way to Financial Freedom
by van K. Tharp
Published 1 Jan 1998

Tharp Glossary Recommended Readings Index FOREWORD Let me start by saying that Trade Your Way to Financial Freedom is required reading for all of my new traders. Of all of Dr. Van Tharp’s published books, this one gives the essence of his teachings from his workshops and home study courses. My name is Chuck Whitman, and I am the CEO of Infinium Capital Management, a proprietary trading firm located in the Chicago Board of Trade. We currently have 90 employees, trade on 15 different exchanges, and trade underlying instruments and options on all asset classes. I have personally purchased many copies of this book, but before I get into that, let me tell you about my experiences with Van Tharp.

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The institutions I have presented ideas to over the years have a problem called “infrastructure.” Large companies are broken into divisions that manage specific parts of their business. In the securities area, one group may handle customer accounts, another will handle stock lending, another will handle proprietary trading, and so on. Each division has its own profit goals and what is called a hurdle rate. The hurdle rate is a computation of the minimum return the division head will accept to entertain a business proposal. The CEO will usually turn management over to the division head. The problem here is that the economy (and the opportunity) doesn’t care about the corporation’s structure.

Who Stole the American Dream?
by Hedrick Smith
Published 10 Sep 2012

The Obama administration, in retreat, pushed to make the derivatives trade more open and regulated, but the banks fought successfully to exempt certain derivatives, such as the credit default swaps that played a big role in the mortgage blowup. Former Fed chairman Paul Volcker advocated barring all regulated banks from proprietary trading on their own account (what came to be called “the Volcker Rule”), to keep superbanks from speculating recklessly and putting the whole system at risk again. Volcker won backing from former Citicorp CEO John Reed, who apologized for what he now called the mistaken Citi-Travelers megamerger. Congress passed a vague version of the Volcker Rule but left its definition to regulators who were besieged by bank lobbyists.

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Volcker: The Reforms Fall Short The Danger: Another Future Collapse It is true that passing any major regulatory legislation over the near unanimous opposition of Republicans was a major achievement for the Obama administration. Creating the Consumer Financial Protection Bureau was a milestone. Passing the Volcker Rule against proprietary trading was a gain, though it was watered down with one loophole that allowed banks to speculate with up to 3 percent of their assets and another loophole that delayed implementing the Volcker Rule for seven years, long enough for banks to fight to expand the loophole and perhaps to elect a bank-friendly president in 2012 or 2016 who would wipe the Volcker Rule entirely off the books.

New Market Wizards: Conversations With America's Top Traders
by Jack D. Schwager
Published 28 Jan 1994

Was there more to it? No, that was a tremendous amount. Clearly you have never worked for Salomon. The company is all about the culture of Salomon Brothers. Bill Lipschutz / 25 OK, tell me about the culture of Salomon Brothers. Salomon Brothers was a firm that was almost solely involved in proprietary trading and for years was run by a handful of very strong, charismatic individuals. They were street fighters who were betting their own money and who really understood what it meant to take risk. It was all about personalities, guts, insight, and honesty and integrity beyond any shadow of a doubt.* Salomon was an institution.

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Of course, that would help explain the apparent paradox posed by my question—that is, how can all those traders make money? Am I interpreting you correctly? Personally, that’s what I believe. However, the argument within Citibank would probably be: “We doubt that’s true, but even if it were, if we weren’t in the market doing all that proprietary trading and developing information, we wouldn’t be able to service our customers in the same way.” That sounds like rationalization. Assume you’re a trader for a bank and you’re expected to make $2.5 million a year in revenues. If you break that down into approximately 250 trading days, that means you have to make an average of $10,000 a day.

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression
by Richard A. Posner
Published 30 Apr 2009

And because safe personal savings (and not just overpriced common stocks and overmortgaged houses) are an important check against depressions, and heavy personal borrowing is a risk factor for them, consideration should perhaps be given to placing limits on credit card and mortgage credit, on easy credit generally, and on the right (which fosters overindebtedness) to eliminate debts by declaring bankruptcy. Other regulatory changes might be desirable, such as limiting leverage, raising credit-rating standards and changing how credit-rating agencies are compensated, forbidding proprietary trading by banks (that is, trading of their equity capital, which puts that capital at risk), adjusting reserve requirements to take more realistic account of the riskiness of banks' capital structures, requiring greater disclosure by hedge funds and private equity funds, requiring that credit-default swaps be traded on exchanges and fully collateralized, and even resurrecting usury laws.

How We Got Here: A Slightly Irreverent History of Technology and Markets
by Andy Kessler
Published 13 Jun 2005

In response, giant fund management company Fidelity, tired of the effect of this conflict by those executing their trades, came up with a solution. Fidelity, which created its own brokerage firm to handle its trades and tossed Wall Street some bones to pay for research, remains the Street’s largest customer. Finally, and controversially, Wall Street makes money by proprietary trading, where firms simply trade for their own accounts. The easiest way to do that is to figure out what their customers are doing and then trade ahead of them. Subtly, of course. A more demanding way firms do this is by creating their own information advantage, finding profitable parts of the market to put their money into, and doing it in a big way.

Kings of Crypto: One Startup's Quest to Take Cryptocurrency Out of Silicon Valley and Onto Wall Street
by Jeff John Roberts
Published 15 Dec 2020

It didn’t take him long to get to work. In Asiff’s view, Coinbase had come within a whisker of complete collapse in December of 2017 as a result of three critical risks: inadequate insurance coverage; a chaotic accounting system that made it impossible to tell if the company was up or down $200 million; and a jerry-rigged proprietary trading system known as “the hedger” that could blow up any minute. The first two risks could be addressed easily enough. As part of the adult supervision mandate, Asiff brought on a chief financial officer, Alesia Haas, who smoothed out the insurance and accounting snafus. The hedger was another matter.

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream
by Arianna Huffington
Published 7 Sep 2010

In Missouri, for example, rates can top 600 percent.52 Yes, you read that right. Not exactly a recipe for “financial stability.” North Carolina’s Kay Hagan offered an amendment that would have clamped down on the $40 billion industry. It was killed without a vote.53 Then there is the Merkley-Levin amendment that would have prohibited banks from making risky proprietary trades—a version of the Volcker Rule.54 It also never even made it to a vote. This wasn’t because it wouldn’t have passed. On the contrary, anger from those mired in the real economy had reached enough lawmakers that the amendment had a real shot. Which is why, as Simon Johnson put it, “the big banks were forced into overdrive to stop it.”

Rigged Money: Beating Wall Street at Its Own Game
by Lee Munson
Published 6 Dec 2011

When trading for its own account, the firm is acting as a dealer. There have been some instances of broker-dealers dealing against customers by front running their orders or otherwise using their information to trade against them. There is a fine line between illegal front running and simply mining data from customers for a dealer’s proprietary trading operations. execution Term to describe the obligation of your broker-dealer to provide the best price on your transaction. This is a subjective term using several inputs, including the speed of filling your order, getting a better price than was quoted, and the ability to justify higher commissions to clients for using a particular broker.

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis
by Kevin Mellyn
Published 30 Sep 2009

They can also enter into other trades to ‘‘hedge’’ their bond portfolios. Institutional investors make substantial amounts of their profits (and their losses) by trading bonds. Investment banks have huge bond-trading operations both to serve these buy-side players and to make money in socalled proprietary trading, essentially by making market bets with their own capital. Because the market is vast and relatively simple, traders have to churn through vast amounts of standard debt instruments to make their bets worthwhile under normal conditions. The big money made by the investment banks over the last decade or so in large part came from inventing new, preferably mind-numbingly complex, financial instruments that were hard to price and trade but offered high returns A great deal of the severity of the 2008 meltdown was rooted in investment banks’ remarkable inventiveness in creating and flogging new classes of bonds that had never before existed.

The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders
by Kate Kelly
Published 2 Jun 2014

See also BlueGold Capital Management; Slyusarenko, Evgenia Andurand Capital opened by, 228–29 anxiety of, about oil price spiral, 127–33 autonomy sought at Vitol, 34–35 with Bank of America, 27–29 BlueGold closed by, 136–37 BlueGold reflecting style of, 38 Bourlot’s deal with, 31–32 Bourlot’s falling out with, 32–33, 78 Brent market bet and, 39–41 character of, 12, 18–20, 21, 23, 28–29, 30–31 competitiveness of, 21 Crema’s proposal to join in BlueGold and, 35–36 Crema’s style compared with, 134–35 crude oil high and low in 2008 called by, 2, 41–44 crude oil position for $8 billion of, 1–4, 16, 127–32 education of, 21, 22, 23–24 on factors affecting oil market, 139 family bias of, against rich, 24 gall bladder surgery of, 40–41 with Goldman Sachs, 25–27 health habits of, 23, 27, 126 impatience with oil market of, 126–27 interview with Goldman Sachs, 24–25 investor letters by, 39, 124, 134 legal inside information for, 30 lifestyle of, 19, 27–28 London relocation with Vitol and, 33 longer-term view learned by, 30 new hedge fund launched by, 139–40 oil contracts purchased in 2011, 126 options after closing BlueGold, 137–38 physical oil business dislike of, 12 sabbatical after Vitol, 35 settlement with Crema, 228 skills honed at Vitol, 30, 34 split with Crema, 135–36 success of, 11, 124, 228–29 swimming ambitions of, 21–22 trade gain during surgery, 2 trading missed after BlueGold, 139 vacation in southern France, 138–39 with Vitol Group, 29–30, 31–35 Antakly, Michel, 177 Arab Spring, 16, 112–13, 125 Arbalet Capital, 229 Arcadia crude-oil case, 192–93 Armajaro Holdings Ltd., 102–3 Arnold, John, 10–11 Aviva, resignation of chief insurer for, 171 backwardation, defined, 33 Bagley, William, 88–89 Balzac, Honoré de, 24 Bank of America Andurand’s work for, 27–29 Merrill Lynch sold to, 43 Ruggles with Merrill commodities and, 105–6, 120 banks. See also specific organizations commodities hedging for companies, 66–68 commodities trading and, 13 house trading stopped by Dodd-Frank and, 226 physical assets ownership of, 68 proprietary trading and, 68–70 speculation by, 69 Barclays Bank and shareholder spring, 171 Barings Bank scandal, 93–94 Barnett, Gary, 194 Bastian, Edward. See also Delta Air Lines Delta hedging decisions and, 113, 208, 213 Ruggles interviewed by, 107, 108 Ruggles permitted to trade for profit by, 122 Bean, Elise, 86 Beard, Alex.

Money Mavericks: Confessions of a Hedge Fund Manager
by Lars Kroijer
Published 26 Jul 2010

And we all have an answer. You have to. You can’t justify charging investors to manage their money if you cannot explain why investing with you is any better than a monkey throwing darts. Answers you hear often from managers are things like ‘forensic accounting’, ‘primary research’, ‘a proven proprietary trading system’, ‘a better process’ and so on. It is no wonder that investors are sometimes unable to decipher the jargon and fall back on investing with companies that have the best performance history. ‘Nobody ever got fired for buying IBM,’ as they used to say. Many investors asked about our competition.

Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street
by Kate Kelly
Published 14 Apr 2009

Whenever trading conditions appeared to be bad, he would approach Goldman’s chief financial officer, David Viniar, and ask him to add to the pile. “Put some more securities in the BONY box,” Paulson would say. Viniar, a fellow cynic, understood the need for liquidity. You could never be too careful, he knew. As Goldman’s business grew during the technology boom and a new emphasis on proprietary trading generated fat returns, a run on the bank seemed less and less likely. But Paulson continued growing the cash reserves. By the time he resigned in 2006 to become Treasury secretary, the sum had grown to some $60 billion. These days, under Blankfein, it was heading toward $100 billion. Now, focusing on the tumultuous day ahead, Paulson called Geithner.

Creative Selection: Inside Apple's Design Process During the Golden Age of Steve Jobs
by Ken Kocienda
Published 3 Sep 2018

This seemingly paradoxical corporate strategy had its roots with Richard Stallman, a renowned programmer and technology activist, a man who believed all software should be free. Stallman railed against companies like Microsoft and Apple, which sold software for money, but kept the source code, the software instructions written by programmers, as a proprietary trade secret. In Stallman’s idiosyncratic belief system, mixing computer code and the profit motive formed a toxic brew whose ill effects compelled companies to hoard the intellectual effort required to write programs and turned software development into a zero-sum game that impeded the advance of technology to the detriment of the human race.

How to Predict the Unpredictable
by William Poundstone

Mark believed that the stock would continue to shoot upward. This counted for a lot because — as yet another token of his invincible luck — he happened to be the son of his firm’s owner. Mark entered a trade for a large block of UPS stock, for the company’s account. He was not buying stock to hold it. Mark was in the firm’s proprietary trading division, where the goal was to sell quickly for a little more than was paid. The market was not cooperating. No sooner had Mark bought UPS than its price began to sag. Mark soon had a staggering loss. His reaction was it was a great buy before, and it’s a better buy now. He doubled down by buying more UPS stock.

How Boards Work: And How They Can Work Better in a Chaotic World
by Dambisa Moyo
Published 3 May 2021

The 2010 Dodd-Frank overhaul of financial regulation, which came in response to the 2008 crisis, encouraged—and in some cases even forced—bank boards to change their strategic plans and business models. Many banks had to shrink their balance sheets, reduce the amount of overall risk they took, and even close proprietary trading desks, which had contributed significantly to profits in the boom years. The deluge of regulation on banks in the wake of the financial crisis was, of course, a unique situation. In more normal conditions, management should be able to anticipate new laws and regulations—in some cases even before they appear on the legislative agenda—because policymakers often run a consultative process with companies and industry representatives.

Good Profit: How Creating Value for Others Built One of the World's Most Successful Companies
by Charles de Ganahl Koch
Published 14 Sep 2015

We have found several resources and mechanisms that are beneficial for increasing the effectiveness of our networks. One is to ensure that knowledge sharing follows the win-win principle. Leaders should ensure that their teams understand the value of knowledge and what portion of it should and shouldn’t be shared with third parties. Proprietary trading insights and intellectual property—including trade secrets and details of business strategies—are all types of knowledge that should rarely or never be shared externally. CONSULTANTS “Hide and seek for $1,000 a week.” That was the mantra of a group of contractor employees working for us on a major turnaround at Pine Bend refinery in the 1980s.

The Inequality Puzzle: European and US Leaders Discuss Rising Income Inequality
by Roland Berger , David Grusky , Tobias Raffel , Geoffrey Samuels and Chris Wimer
Published 29 Oct 2010

Experience has shown, such mechanisms will only lead to attempts to circumvent them. Moreover, as far as the financial industry is concerned, there is also a need to differentiate between various functions. Performance-based pay has a different impact depending on whether it is used, for instance, as an incentive to sell retail products, as an incentive in proprietary trading or risk management operations, or at the board level. The key issue here is the extent to which performance-based pay affects the risk situation of the firm. Finally, it would also be wise to keep regulation limited to broad principles, as there is a need to differentiate between industries.

How to Speak Money: What the Money People Say--And What It Really Means
by John Lanchester
Published 5 Oct 2014

With such low effective tax rates—and, importantly, the low tax rate of 20 percent on income from capital gains—it’s not a huge surprise that the share of income going to the top 1 percent has doubled since 1979, and that the share going to the top 0.1 percent has almost tripled, according to the economists Thomas Piketty and Emmanuel Saez. Recall that the wealthiest 1 percent of Americans own about 40 percent of the nation’s wealth, and the picture becomes even more disturbing.64 prop trading In proprietary trading, banks bet their own money for their own benefit, as opposed to making such trading only on behalf of their clients. It is supposed to be banned by the forthcoming Volcker rule. quantitative easing (QE) An “unconventional” technique used by governments and central banks when interest rates are too low to go down any further, but the need for economic stimulus still exists.

The Trouble With Billionaires
by Linda McQuaig
Published 1 May 2013

Buckley disputes this. He insists that, on the contrary, ordinary people would benefit from the greater stability and efficiency that an FTT would bring to markets. The real victims of the tax would be the big financial players. ‘Most short-term trades are initiated by hedge funds, and hedge-fund-like proprietary trading desks of the major banks,’ writes Buckley. ‘Accordingly, this tax will impact the profits of hedge funds and many of the major banks.’ In doing so, it would take a bite out of the financial sector – something that is long overdue. As the respected US tax commentator Lee A. Sheppard observes, an FTT would hit those in the financial sector who were bailed out after the financial crash with taxpayer money.

Flash Crash: A Trading Savant, a Global Manhunt, and the Most Mysterious Market Crash in History
by Liam Vaughan
Published 11 May 2020

CHAPTER 23: ALL IS LOST That faith was tested on September 2: USA v. Sarao indictment, September 2, 2015, www.justice.gov. “If I am short I want to spoof it down”: USA v. Sarao indictment, September 2, 2015, www.justice.gov. was charged by the CFTC with spoofing: “CFTC Charges Chicago Trader Igor B. Oystacher and His Proprietary Trading Company, 3 Red Trading LLC, with Spoofing and Employment of a Manipulative and Deceptive Device,” October 19, 2015, www.cftc.gov. in the case of Oystacher: Although, unlike Sarao, Oystacher was never criminally charged. The DOJ looked into the case but ultimately decided not to bring charges, to the chagrin of some CFTC enforcement staff.

The Buy Side: A Wall Street Trader's Tale of Spectacular Excess
by Turney Duff
Published 3 Jun 2013

“But you keep having issues, so I think you need to get checked out.” I’ve missed a few days, but he doesn’t understand how difficult things have been at home. I have to get Krishen off my back. So I tell him I’ll go to the doctor next week. But my health issues aren’t the only reason for our meeting. He wants to discuss our proprietary trading. “I want you guys to only trade healthcare names we’re not involved with,” he says. “Some of the analysts think you only cherry-pick their best ideas for your own trading account.” What the fuck is he talking about? That’s what I do. I make us more money because the analysts don’t know how to trade.

Market Sense and Nonsense
by Jack D. Schwager
Published 5 Oct 2012

In pairs trading, the price ratios of closely related stocks are tracked (e.g., Ford and General Motors), and when the mathematical model indicates that one stock has gained too much versus the other (either by rising more or by declining less), it is sold and hedged by the purchase of the related equity in the pair. Pairs trading was successful in its early years, but lost its edge as too many proprietary trading groups and hedge funds employed similar strategies. Today’s statistical arbitrage models are far more complex, simultaneously trading hundreds or thousands of securities based on their relative price movements and correlations, subject to the constraint of maintaining multidimensional market neutrality (e.g., market, sector, etc.).

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe
by Greg Ip
Published 12 Oct 2015

Governments everywhere are trying to cut their deficits, corporations are accumulating huge amounts of cash, and emerging markets are stockpiling foreign reserves as protection against the next crisis. Regulators have forced lenders to toughen their lending standards, hold more capital and highly liquid assets such as Treasury bills that could be sold in an emergency, and reduce their involvement in risky things like proprietary trading and derivatives. It’s hard to feel sorry for banks, whose propensity for bad behavior, from mishandling foreclosures to manipulating interest rates, seems limitless. Still, the wave of regulation and litigation made banks more reluctant to lend at a time when the economy badly needed more credit.

1494: How a Family Feud in Medieval Spain Divided the World in Half
by Stephen R. Bown
Published 15 Feb 2011

João II also was determined to keep other nations from interfering in an enterprise that he believed belonged exclusively to Portugal by dint of its years of investment and its priority in exploring the southern lands. In a display of his strong-arm tactics, João instituted a policy that any knowledge about wind patterns, currents or harbours, and any insights into local customs gained by mariners or merchants on voyages sanctioned by the crown—that is, all legal voyages along the African coast—would be proprietary trade secrets of the Portuguese state and would not be shared with the mariners of other European states. The knowledge gained from these voyages was an extremely valuable asset, and navigators were made to swear an oath of secrecy before their service—there were even arguments put forward that new discoveries should not be marked on maps because of the threat of competition.

The Power of Passive Investing: More Wealth With Less Work
by Richard A. Ferri
Published 4 Nov 2010

On the other hand, retention is considerably higher because passive advisors have a better understanding of their client’s financial needs and the strategy better satisfies those needs. These are all wrong assumptions. It’s not about beating the market. Clients don’t care to hear sound bites on how a proprietary trading model added 100 basis points of return over the last 30 days. That’s setting them up for disappointment and ultimately terminating the agreement with an advisor. There is an expression in the Gospel that sums up advisors who practice active management: “Live by the sword, die by the sword.”

Reskilling America: Learning to Labor in the Twenty-First Century
by Katherine S. Newman and Hella Winston
Published 18 Apr 2016

Joint union-management apprenticeship programs in the construction industry are less likely than the average program to use community-technical colleges, but outside construction, joint programs are equally likely to assign their apprentices to community-technical colleges. 32.    This figure is similar to the share of sponsors supporting the instruction provided by other organizations such as public technical colleges and proprietary trade schools. Robert I. Lerman, “Training Tomorrow’s Workforce: Community College and Apprenticeship as Collaborative Routes to Rewarding Careers” (Center for American Progress, December 2009), https://cdn.americanprogress.org/wp-content/uploads/issues/2009/12/pdf/comm_colleges_apprenticeships.pdf. 33.    

Learn Algorithmic Trading
by Sebastien Donadio
Published 7 Nov 2019

While there is no real way to ban other participants from discovering the same trading signals that are being used in our algorithmic trading strategies, the industry practices have evolved over time to reflect the extremely secretive nature of the business, where firms typically make it difficult for employees to go work for a competitor. This is done through non-disclosure agreements (NDAs), non-compete agreements (NCAs), and strictly monitoring the development and use of proprietary trading source code. The other factor is the complexity of the trading signals. Typically, the simpler a trading signal is, the more likely it is to be discovered by multiple market participants. More complex trading signals are less likely to be discovered by competing market participants but also require a lot of research and effort to discover, implement, deploy, monetize, and maintain.

Ugly Americans: The True Story of the Ivy League Cowboys Who Raided the Asian Markets for Millions
by Ben Mezrich
Published 3 May 2004

Throughout the short journey from the hotel, he had noticed how much more confident he felt than when he had first found himself alone in Japan. The past three months had been a whirlwind, to be sure, but he could tell that he’d begun to change. He was getting his legs, as Akari would put it; he was beginning to see where he fit in. He was on his way to becoming a trader. Three weeks earlier, he’d made his first tentative proprietary trade—under Carney’s supervision, of course. Three times since then, he’d used the streaming buy and sell orders on his terminal to spot arbitrage opportunities, and he had made the trades himself, selling contracts high and buying them back on the cheap. Carney had encouraged him to continue thinking like a prop trader, even though he wasn’t yet allowed to live like one.

Uberland: How Algorithms Are Rewriting the Rules of Work
by Alex Rosenblat
Published 22 Oct 2018

For instance, Uber obtained the medical records of a passenger who accused her Uber driver of rape—and they did so without her permission.42 In another instance, Uber made threats against journalist Sarah Lacy as well as her family, suggesting that they would entertain the idea of a smear campaign against her because of her justifiably scathing critiques.43 And during the legal proceedings of a suit launched by Waymo (Alphabet’s self-driving car unit) against Uber for allegedly stealing proprietary trade secrets about self-driving cars, a former Uber employee accused Uber of massive corporate espionage.44 Uber has a history of breaking trust with its stakeholders. In 2011, for example, the company held a Chicago launch party for its black-car service. It allegedly displayed to guests a stalker-y data visualization of the movements and whereabouts of thirty New York City Uber users, along with a list of their names via “God View,” Uber’s global view of the geolocation details of its app users.45 These incidents demonstrate a culture of data curation at Uber that can turn predatory.

Bitcoin Billionaires: A True Story of Genius, Betrayal, and Redemption
by Ben Mezrich
Published 20 May 2019

In 2017, Jimmy Choo was bought for over a billion dollars by Michael Kors Holdings. Few people in the world understood the cross-section of the finance, fashion, entertainment, and politics better than Matthew Mellon II. Mellon fit perfectly into Tyler and Cameron’s ongoing Bitcoin tour. Although they usually met with institutions like hedge funds, proprietary trading firms, family offices, and other financial companies, they’d decided to expand their outreach leading up to the Bitcoin 2013 conference to anyone interesting enough, and interested enough, to take their calls. It was a strategy that had landed them in front of some pretty spectacular people.

Currency Wars: The Making of the Next Gobal Crisis
by James Rickards
Published 10 Nov 2011

Economists should be no less diligent than carpenters in selecting the right tools. As applied to capital and currency markets, the correct approach is to break up big banks and limit their activities to deposit taking, consumer and commercial loans, trade finance, payments, letters of credit and a few other useful services. Proprietary trading, underwriting and dealing should be banned from banking and confined to brokers and hedge funds. The idea that large banks are needed to do large deals is nonsense. Syndicates were invented for exactly this purpose and are excellent at spreading risk. Derivatives should be banned except for standardized exchange-traded futures with daily margin and well-capitalized clearinghouses.

My Life as a Quant: Reflections on Physics and Finance
by Emanuel Derman
Published 1 Jan 2004

In the words of a famous Goldman ex-partner, Gus Levy, Goldman was long-term greedy rather than short-term greedy. At Salomon, I thought, it was every man for himself and God against them all. The key responsibility of my research group was to support the ARMS dealers, who, unlike the arb group, were more interested in earning a spread by servicing clients than in carrying out genuine proprietary trading. We helped them by writing short quantitative marketing reports that provided generally truthful ammunition for use by the salespeople. When the desk acquired some new pool of mortgages, we ran our models on them and tried to explain where their value lay. There was a range of different models and corresponding metrics that you could use to gauge the value of a pool.

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues
by Alain Ruttiens
Published 24 Apr 2013

The Calmar ratio is associated with the absolute value of MDD measure, relatively to the p.a. return of the portfolio: Continuing with the same example, given a p.a. return of 17.96%, the Calmar ratio is 0.85 = 0.1796/0.2111. Z-score Besides their use as a risk measure, volatilities allow us to compute a rather common measure used in proprietary trading: the Z-score. This measure quantifies spreads of prices or returns towards their average on a past period of time, allowing to assessing to what extent a price, for example, is abnormally cheap for a buying opportunity. Actually, the Z-score of a random variable X (a price or a return) is the corresponding standardized normal random variable Z, assuming the variable is distributed as a Gaussian, of mean X and standard deviation (=volatility) σ: Example. let us consider the S&P 500 daily prices and log returns during the whole year 2009, as in Figure 14.4.

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe
by Gillian Tett
Published 11 May 2009

one muttered to colleagues before Dimon’s arrival. In the years before he had arrived at JPMorgan Chase, rumors circulated that suggested Dimon was no fan of investment banking. This was partly because back in the late 1990s, Dimon ran Salomon Smith Barney, the investment banking arm of Citigroup, and shut down the US proprietary trading desk. The furious Salomon bankers promptly concluded that Dimon hated traders. Dimon vociferously denied that, pointing out that he had chosen to merge with an investment bank when he and Weill were building up Citigroup. The rumors, though, made some J.P. Morgan bankers wary: they wondered what Dimon would do with their derivatives powerhouse.

The Myth of Capitalism: Monopolies and the Death of Competition
by Jonathan Tepper
Published 20 Nov 2018

About the Authors JONATHAN TEPPER is the coauthor of Endgame, a book on the sovereign debt crisis, and Code Red, a book on unconventional monetary policy after the global financial crisis. Jonathan is founder of Variant Perception, a macroeconomic research group that caters to hedge funds, banks, and family offices. Jonathan has worked as an equity analyst at SAC Capital and as a vice president in proprietary trading at Bank of America. Jonathan is a founder of Demotix, a citizen-journalism photo agency. In 2012 he and his partner Turi Munthe sold Demotix to Corbis, which was owned by Bill Gates. He received a BA with highest honors in history and honors in economics from the University of North Carolina at Chapel Hill.

Systematic Trading: A Unique New Method for Designing Trading and Investing Systems
by Robert Carver
Published 13 Sep 2015

How I choose my rules The process I use to avoid fitting almost entirely. 40. Another common term for this is curve fitting. 51 Systematic Trading The perils of over-fitting The 50 model kid Shortly after leaving the hedge fund industry, I began discussions about consulting, and managing some capital, for Aqueduct Capital,41 a local proprietary trading firm. The office contained the usual mixture of grizzled ex-LIFFE traders and naïve youths, all day trading a handful of futures contracts. But the boss was particularly proud of his quantitative team which consisted of a couple of 20-somethings toting PCs running an off-the-shelf back-testing software package.

Easy Money: Cryptocurrency, Casino Capitalism, and the Golden Age of Fraud
by Ben McKenzie and Jacob Silverman
Published 17 Jul 2023

Even the company’s press release announcing its bankruptcy filing contained a few nods to its community—clearly an attempt by the company at cooling the mark. They were assuring jilted customers that this wasn’t a normal company; it was a community, and they were looking out for you even in hard times. For a couple years, the Celsius community was enjoying fat returns thanks to the definitely-not-a-bank’s proprietary trading methods. It was based on a lie, that of profitability, but the public either didn’t know or didn’t want to ask what made the scheme possible. “Nobody cared,” said James. “It’s funny how that works.” When I stumbled upon Mashinsky at SXSW in early 2022, Celsius seemed to be in decent shape.

Chaos Kings: How Wall Street Traders Make Billions in the New Age of Crisis
by Scott Patterson
Published 5 Jun 2023

After briefly looking as if he might become one of Hollywood’s top producers, associated with such blockbusters as Mama Mia! and The Social Network, he drove his company into bankruptcy amid myriad allegations of fraud.) A better opportunity had opened up. Neil Chriss, the NYU professor who’d put Spitznagel together with Taleb back in 1999, told him about a unique position at a secretive proprietary trading outfit at Morgan Stanley, the giant New York investment bank. It had a ho-hum name—Process Driven Trading, PDT for short—and a spectacular secret. Though few had heard of it, PDT was one of the most profitable trading operations Wall Street had ever seen. PDT was the ultimate quant shop. Staffed with Ph.D. mathematicians, electrical engineers, computer programmers, and physicists, it had launched in the early 1990s when a quirky, brilliant mathematician and poker aficionado, Peter Muller, decided to see if a trading strategy he’d worked out on paper might succeed in the real world.

Owning the Sun
by Alexander Zaitchik
Published 7 Jan 2022

In the bids submitted by Pfizer and Glaxo, Nehru’s proposed factory was reduced to a refining and bottling center for bulk penicillin shipped directly from the companies’ U.S. factories. The best of the bad offers belonged to Merck. The company offered to build a full-cycle penicillin factory in India, conditional on the payment of burdensome royalties extending for decades. The company attempted to sweeten the pitch by dangling access to a certain proprietary “trade secret” that only its technicians possessed. Providing a partial description of this “secret,” Merck officials claimed that it would reduce local prices in the long term and thus take the sting out of the long-term royalties clause. Indian scientists determined that the “secret” manufacturing method in question was not Merck’s, but the subject of a recent article in Industrial Engineering Chemistry, a journal available at Indian libraries.

The Pyramid of Lies: Lex Greensill and the Billion-Dollar Scandal
by Duncan Mavin
Published 20 Jul 2022

When the Oracle acquisition happened, he still had stock worth tens of millions of dollars. Mickey Carusillo was another ex-O’Connor trader. Carusillo had managed bond and equity trading before the Chicago firm was taken over. Since then, he’d spent decades amassing a fortune as a partner in a so-called proprietary trading firm. Carusillo appeared in a 2019 article in the US business magazine Crain’s as he was trying to sell his 4,300 square foot Chicago apartment for $4.3 million. ‘We’re only using this place about four months out of the year,’ he said, explaining that he and his wife spent most of their time at their Florida home.

The Clash of the Cultures
by John C. Bogle
Published 30 Jun 2012

Certainly derivative transparency will be a plus, as will new requirements for banks’ capital. But after all the horse trading between Democrats and Republicans—and reformers, bankers, and lobbyists—I fear that its complex, obtuse regulations (some 170 separate rules are still being developed) involved in limiting proprietary trading by banks makes me wish we’d taken the simple step of restoring the separation of deposit taking banks from investment banks. The Glass-Steagall Act of 1933 worked well until it was gradually eroded and finally repealed in 1999. We’ve had too much crime and not enough punishment in our financial sector.

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile
by Alexander Davidson
Published 1 Apr 2008

Banks In City jargon, banks are on the sell side, which means that they sell to funds, investors and other customers, who are on the buy side. The banks employ traders in derivatives, money market instruments, foreign exchange, bonds and equities. The traders complete transactions with traders in other banks, sometimes for their own bank, which is proprietary trading, and sometimes for a client, in which case they will sometimes use an inter-dealer broker (see below). Traders will specialise in a particular area. For example, traders will work on the shortterm interest rates (STIR) desk, where they will trade repos, cash, certificates of deposit, forward rate agreements and very short-term interest rate swaps.

Money: The Unauthorized Biography
by Felix Martin
Published 5 Jun 2013

On the other side of the Atlantic, the newly elected coalition government of the U.K. appointed an Independent Commission on Banking under the leadership of the eminent Oxford economist Sir John Vickers, in June 2010. Both groups recommended a new segregation of banking activities. There were differences of nuance—Volcker chose to distinguish client-oriented and proprietary trading, whilst Vickers drew the line between banks’ activities in retail and wholesale markets; and Volcker recommended that segregated activities be done in legally separate companies, whereas Vickers thought “ring-fencing” them within existing conglomerates would be enough—but the underlying philosophy was the same.

A Pelican Introduction Economics: A User's Guide
by Ha-Joon Chang
Published 26 May 2014

The most important types of funds include: pension funds, investing money that individuals save for their pensions; sovereign wealth funds, which manage state-owned assets of a country (Government Pension Fund of Norway and Abu Dhabi Investment Council are two of the biggest examples); mutual funds or unit trusts, which manage money pooled by small individual investors that buy into them in the open market; hedge funds, which invest actively in high-risk, high-return assets, using a pool of large sums given to them by very rich individuals or other, more ‘conservative’, funds (e.g., pension funds); private equity funds, which are like hedge funds, but make money solely out of buying up companies, restructuring them and selling at a profit. In addition to selling shares and bonds for their client companies, investment banks buy and sell shares and bonds with their own money, hoping to make a profit in the process. This is known as proprietary trading. Investment banks also earn money from helping companies to engage in mergers and acquisitions (or M&A). But the service that investment banks provide in this process is more of a consulting service than a ‘banking’ service. Since the 1980s, and especially since the 1990s, investment banks have increasingly focused on the creation and the trading of new financial products, such as securitized debt products and derivative financial products, or simply derivatives.* These new financial products became popular among investment banks because, to put it bluntly, they let them make more money than did ‘traditional’ businesses, such as selling shares and bonds or advising on M&A.

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity
by Joseph E. Stiglitz
Published 28 Jan 2020

And there is a need for government to encourage greater diversity in financial institutions, especially through the support of cooperatives. In the next chapter, we discuss another arena in which the EU needs more cooperation to ensure that the European project is a success: taxation. * The main provisions of which restricted a bank’s ability to engage in proprietary trading, i.e., trading on its own behalf, using the information that it gleans from serving others. The conflicts of interest were obvious, though banks pretended that they didn’t exist. † There were provisions in the contracts that seemingly held the originators and investment banks partially accountable for losses.

Greed and Glory on Wall Street: The Fall of the House of Lehman
by Ken Auletta
Published 28 Sep 2015

Stalling the appointment of Rubin was one of the few cautious steps Glucksman took that summer. Over the next two months he announced that Shel Gordon, whose career had been in sales and trading, would be shifted as head of the nine-hundred-employee equity division (which covered all common stock trading, all retail and institutional distribution, and all of Lehman’s proprietary trading, including risk arbitrage) to run the banking department, displacing the troika of Roger Altman, François de Saint Phalle and Vincent Mai. Although banking partners were not happy with the unwieldy, relatively inexperienced troika, to impose someone from trading on the forty-fourth-floor banking department—no matter how personally agreeable Shel Gordon was—made many bankers queasy.

The Dealmaker: Lessons From a Life in Private Equity
by Guy Hands
Published 4 Nov 2021

With the Japanese economy showing no signs of recovery, that meant developing its international business. And that consideration is what underpinned Ethan Penner’s business and gave me my opportunity. His real estate operation was one of four new ventures, including one trading in emerging markets business, a proprietary trading business in London and a debt trading business in New York. Nomura’s Tokyo-based management’s master plan was to roll out new ventures in New York, London, the Middle East, Singapore and elsewhere using the strength of their Japanese balance sheet to give top traders and entrepreneurs the ability to make money as they saw fit.

The Accidental Investment Banker: Inside the Decade That Transformed Wall Street
by Jonathan A. Knee
Published 31 Jul 2006

This is equally true whether an equity trader is facilitating a trade in securities between two institutional investors, a sales person is marketing a new equity offering or an M&A banker is managing the sale of a corporate subsidiary. In each case, they serve as “agents” rather than “principals” in these deals. Many of the other investment banking controversies of recent years have stemmed from the decision by most investment banks to cross the line from agent to principal to a greater or lesser degree. The use of proprietary trading strategies, where the investment bank puts its own capital at risk, usually developed in windowless rooms by rocket scientists of various stripe, has resulted in sales and trading accounting for the majority of the profits of some investment banks during certain periods. Although there is nothing wrong with this per se, it has raised questions as to whether these profits come at the expense of other investors.

Crashed: How a Decade of Financial Crises Changed the World
by Adam Tooze
Published 31 Jul 2018

In which case the answer was to restrict bailouts and to make the industry pay for them (Title II—Orderly Liquidation Authority) and to cap banks’ further growth (Title VI, sections 622 and 623). Had investment banks used client money to gamble? If so, the thing to do was to reinstate 1930s-style divisions between commercial and investment banking by way of the so-called Volcker rule banning “proprietary trading” (Title VI, Volcker rule). All of these theories about the crisis of 2007–2009 had major political resonance. All of them made their way into the meandering text of Dodd-Frank. Many of them were sensible and worthwhile measures that redressed some of the grosser imbalances in the financial services industry.

…

Each one became the target for no-holds-barred lobbying by interested parties, who could now operate outside the limelight of congressional debate. By July 2013, three years on from the passage of the law, barely 155 of the 398 required rules had been finalized.51 The highly controversial Volcker rule was a case in point.52 How to draw internal divisions inside banks to insulate client money from proprietary trading was a hugely technical and contentious business. Even with the best will in the world it was nearly impossible to draw a line between the actions of a bank in making a market for a client and trading on its own behalf. What emerged was less a “bright” regulatory line than a Rorschach blot. It took until December 2013 for the five agencies involved to agree on a wording of the basic Volcker rule, 1,238 days after Dodd-Frank was passed.53 The result was a 71-page document with an explanatory addendum that ran to a modest 900 pages.

Planet Ponzi
by Mitch Feierstein
Published 2 Feb 2012

The process of adjustment may be brutal, but it won’t last for long‌—‌and once it’s over, we’ll have a global economy ready to march forwards once again. Part of that rebuilding effort will need to involve the dismantling of the over-large, ‘too big to fail’ institutions that dominate both investment and retail banking. As rumors spread earlier this year of huge losses emerging on its proprietary trading book, JP Morgan’s chief executive, Jamie Dimon, dismissed those concerns as a ‘tempest in a teapot’. That tempest was later estimated to have cost the bank some $2 billion‌…‌except that as the final numbers were crunched, it turned out that the actual cost was closer to $7 billion. What’s truly chilling about this incident isn’t the size of the numbers, it’s the fact that a well-regarded bank doesn’t even notice when $7 billion goes walkabout.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America
by Danielle Dimartino Booth
Published 14 Feb 2017

A report by the Fed’s inspector general showed that the losses stemmed from JPMC’s “failures in prioritization, loss of institutional knowledge through turnover, and poor coordination among agencies.” The Whale’s losses revealed that even under the SEC’s new “Volcker Rule,” designed to put a governor on proprietary trading, a bank could still place a massive bet as a hedge against a decline in its entire portfolio. One author of the bill, Sen. Carl Levin (D-Mich.), called the gap “a big enough loophole that a Mack truck could drive right through.” The other author of the bill, Sen. Jeff Merkley (D-Ore.), had a message for Dimon: “If you want to be a head of a hedge fund, be a hedge fund.

Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street
by Sheelah Kolhatkar
Published 7 Feb 2017

Established in 1880, Gruntal had survived the assassination of President McKinley, the crash of 1929, oil price spikes, and recessions, largely by buying up other tiny, primarily Jewish firms while also staying small enough that no one paid it much attention. From offices across the country, Gruntal brokers tried to sell stock investments to dentists and plumbers and retirees. When Cohen arrived, the firm was just starting to move more aggressively into an area called proprietary trading, trying to make profits by investing the firm’s own money. For an eager Jewish kid from Long Island like Cohen, Wall Street didn’t extend an open invitation. Even though he was freshly out of Wharton, Cohen still had to push his way in. Gruntal wasn’t well-respected, but he didn’t care about prestige.

Trading Risk: Enhanced Profitability Through Risk Control
by Kenneth L. Grant
Published 1 Sep 2004

My experience is that while most marketbased entities strive not to cross ethical boundaries with respect to issues that fall under the general heading of front-running, some form of this activity almost certainly takes place in many guises every single business day. Brokerage firms live off information flow, which in many cases is as important as commissions. Most large banks and broker/dealers have proprietary trading arms; and though these groups are typically prevented from transacting based on information derived from the trading patterns of their customers, some slippage is inevitable. These firms also have market-making operations whose business it is to provide liquidity to the markets and who cannot provide this essential service unless the associated trading they undertake themselves is consistently profitable.

Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy
by Iain Martin
Published 11 Sep 2013

An integral part of the operation – alongside the corporate units of the old NatWest and the Royal Bank – were the various trading operations in financial markets. The Mathewson mantra had been that the Royal Bank didn’t do classic investment banking. Conventional banks, he warned, should be wary of trying to ape the fancy footwork of institutions such as Goldman Sachs or Merrill Lynch which indulged in huge amounts of proprietary trading in currency, derivatives and securities to make profits, alongside their work advising clients on deals. This soothing claim was at odds with the expansion that had started under Mathewson himself – who made it clear to Johnny Cameron when he hired him to work under Robertson that he was to expand the Royal Bank’s investment banking-type activities in London and beyond.

Market Risk Analysis, Quantitative Methods in Finance
by Carol Alexander
Published 2 Jan 2007

Indeed, over the last generation, there has been a marked increase in the size of market risks handled by banks in comparison to a reduction in the size of their credit risks. Since the 1980s, banks have provided products (e.g. interest rate swaps, currency protection, index linked loans, capital guaranteed investments) to facilitate the risk management of their customers. They have also built up arbitrage and proprietary trading books to profit from perceived market anomalies and take advantage of their market views. More recently, banks have started to manage credit risks actively by transferring them to the capital markets instead of warehousing them. Bonds are replacing loans, mortgages and other loans are securitized, and many of the remaining credit risks can now be covered with credit default swaps.

Radical Technologies: The Design of Everyday Life
by Adam Greenfield
Published 29 May 2017

The price of noncompliance with their model of good character is punitive: the interest rate such low-scoring borrowers are assessed literally doubles. Branch, like many institutions in similar situations, presumably keeps the precise composition of its risk assessment algorithm secret for two main reasons. The first is simply that they derive value from its being a proprietary trade secret, or believe that they do. They think that it gives them a competitive advantage, and they don’t want rivals nullifying that advantage by copying it. That part is straightforward enough. But the second reason is that, like all such metrics, these stats can be juked: Branch’s algorithm is subject to Goodhart’s Law, the principle that “when a measure becomes a target, it ceases to be useful as a measure.”66 In other words, they believe that if it became more widely known just how their algorithm arrived at its determinations, it would be easier for unreliable people to act in ways that would fool it into classifying them as trustworthy.

Stock Market Wizards: Interviews With America's Top Stock Traders
by Jack D. Schwager
Published 1 Jan 2001

f«E Q U A N T I T A T I V E l l i E I heard that your firm ran into major problems last year [1998], but when I look at your performance numbers, I see that your worst equity decline ever was only 11 percent—and even that loss was recovered in only a few months. I don't understand how there could have been much of a problem. What happened? The performance results you're referring to are for our equity and equity-linked trading strategies, which have formed the core of our proprietary trading activities since our start over eleven years ago. For a few years, though, we also traded a fixed income strategy. That strategy was qualitatively different from the equity-related strategies we'd historically employed and exposed us to fundamentally different sorts of risks. Although we initially made a lot of money on our fixed income trading, we experienced significant losses during the global liquidity crisis in late 1998, as was the case for most fixed income arbitrage traders during that period.

Other People's Money: Masters of the Universe or Servants of the People?
by John Kay
Published 2 Sep 2015

But such conflicts are not confined to the problematic broker–dealer relationship. The modern investment bank typically issues securities in the primary market, makes a secondary market in securities, gives corporate advice, undertakes asset management on behalf of retail and institutional investors, and engages in proprietary trading on its own account. Each of these activities is potentially in conflict with the others. Goldman was excoriated not only by Senator Collins; Chancellor Leo Strine, the leading judge in Delaware (the principal forum for corporate litigation in the USA), lambasted the firm for its multiple conflicts of interest in the acquisition of the El Paso oil business by Kinder Morgan.8 Broadly, the bank advised El Paso, its client, to accept a sharply lowered offer from Kinder Morgan, a company in which the firm held a material shareholding and the partner advising a large personal stake.

Hedgehogging
by Barton Biggs
Published 3 Jan 2005

“There are so many macro players and momentum investors, they’re bumping into each other.There must be a couple of hundred new macro hedge funds formed in the last six months by guys who think they are the next Stan Druckenmiller or Lewis Bacon. Some of these guys are so green, they can confuse you with their stupidity, and they are big and clumsy, so ccc_biggs_ch01_1-8.qxd 11/29/05 11:11 AM Page 7 The Triangle Investment Club Dinner 7 they can hurt you if you bump into them. And then, stumbling around are the proprietary trading desks of all the big investment banks, plus various rogue central banks like Bank Negara and the Nigerians. Last week, I got crunched between an Asian central bank and some rookie hedge fund guy who panicked on his first macro trip. It’s all very disorienting!” The guy, despite his alleged bruises, looked tanned and rested, so I ignored him.

Red-Blooded Risk: The Secret History of Wall Street
by Aaron Brown and Eric Kim
Published 10 Oct 2011

All of these maneuvers have been done many times in many variants. They have always, always led to disaster. The final function of financial markets is price discovery. By establishing reliable prices in public, everyone’s economic planning is improved. Here the change was driven by hedge fund and bank proprietary trading or prop desks. Improvements in risk management led to astonishing increases in leverage. Increased leverage makes it profitable to exploit smaller market anomalies. All other things being equal, more leverage means wilder markets. But other things weren’t equal. The risk management improvements more than offset the danger from increased leverage.

That Used to Be Us
by Thomas L. Friedman and Michael Mandelbaum
Published 1 Sep 2011

The catastrophic financial meltdown of 2008 occurred in the wake of considerable deregulation of the nation’s financial system, which was spurred by, among other things, the belief that the financial industry could largely regulate itself, and that the separations between traditional commercial banking, on the one hand, and investment banking and proprietary trading on a bank’s own behalf, on the other—separations put in place to prevent a recurrence of the Great Depression—were no longer necessary. This belief turned out to be wrong, and devastatingly so. To be sure, the 2008 subprime meltdown was the product of many causes. A mountain of excess savings built up in Asia was looking for a higher return and flowed to subprime bonds—which paid significantly higher interest rates because they were made up of mortgages granted to people who were higher lending risks.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor
by John Kay
Published 24 May 2004

The nature of the transaction revealed by the reported components of Kevin Hudson, the man who sold the deal on learning that P&G would go ahead with the planned transaction. "This is a wet dream ... This is a new customer. That's the key. A customer that has never done structured leveraged proprietary trades before ... I am wallowing in a little glory right now. Yeah. In fact, I don't even have the desire to call my other clients and beat them up this afternoon." Hudson's boss, Jack Lavin, was cruder still: "I think my dick just fell of(" Transactions at Long-Term Capital Management were much more Culture and Prosperity { 237} sophisticated.

From Airline Reservations to Sonic the Hedgehog: A History of the Software Industry
by Martin Campbell-Kelly
Published 15 Jan 2003

These magazines typically sold 50,000–150,000 copies a month.10 As was noted earlier, a crucial differences between a videogame console and a home computer were that the latter could be programmed by the user and that it came equipped with a keyboard and secondary storage. Thus, barriers to entry into software development for home computers were almost non-existent. No additional software development system was needed, there were no proprietary trade secrets to unlock, and programs could be duplicated on the computer itself, with no need for access to a third-party manufacturing plant. The lack of significant barriers to entry led to the phenomenon of the “bedroom coder.” Thousands of would-be software tycoons began to write games in their spare time, selling their programs through small ads in computer magazines.

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
by Satyajit Das
Published 15 Nov 2006

This may be the only way to hedge the derivative and it may also be more profitable to hedge in this way. There are ‘flow’ traders, known as market-makers. They are primarily there to support the sales desks (at least, that is what the sales desks tell me). It is entirely possible to trade without having clients at all – ‘prop’ (proprietary) trading. The idea is to take positions independent of trading with clients, dispensing with the pesky sales desk and irritating customers (that is what prop traders tell me). The sole objective is to make money by reading the changing market prices correctly. The boundary between ‘flow’ and ‘prop’ trading is not clear.

What Should I Do With My Life?
by Po Bronson
Published 2 Jan 2001

Without a job, Mark didn’t feel like a man. He got depressed and gave up after a month. He called Wells Fargo and begged for his old job back. They turned him down. He moved into his sister’s apartment in Seattle. He traded several steps down the prestige curve and ran money for a regional dealer. This was called “proprietary trading,” and it was not like what he’d been doing at Wells Fargo, where he kept their money safely invested at reasonable returns. Prop trading is day trading, and it requires a daredevil philosophy. Much as Mark wanted to think of himself as a daredevil (based on his recent life decisions), he really didn’t fit in.

Commodity Trading Advisors: Risk, Performance Analysis, and Selection
by Greg N. Gregoriou , Vassilios Karavas , François-Serge Lhabitant and Fabrice Douglas Rouah
Published 23 Sep 2004

The performance attributes of the various asset classes are independent among themselves and are not highly correlated. Commodity trading advisors (CTAs), which typically exhibit low and negative correlation with stock and bond markets, can help to provide downside protection during volatile and bear markets. CTAs trade managed futures using proprietary trading programs that buy and sell commodities and financial futures on options and futures markets around the world. What makes CTAs special? They are different from hedge fund and long-only portfolio managers because they do not follow trends in stock or bond markets, but rather attempt to seize opportunities in a variety of commodity and financial futures markets.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

Under the proposed reforms, the administration would oblige banks to keep some of the mortgage securities they distribute on their own books, but just 5 percent. Unlike in the 1930s, no thought has been given to splitting up the essential utility aspects of the financial system—customer deposits, check clearing, and other payment systems—and the casino aspects, such as investment banking and proprietary trading. There will be no return to the Glass-Steagall Act, which means “too big to fail” financial supermarkets, such as Bank of America and JPMorgan Chase, will continue to dominate the financial system. The administration has said new mandatory capital requirements will be extended to any financial firm “whose combination of size, leverage and interconnectedness could pose a threat to financial stability if it failed,” but none of these terms has been defined, and it isn’t clear how far the new rules will be applied to big hedge funds, private equity firms, and the finance arms of industrial companies.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies
by Jeremy J. Siegel
Published 18 Dec 2007

Indexing became so popular that in the first six months of 1999 nearly 70 percent of the money that was invested went into index funds.13 By 2007, all Vanguard 500 Index funds had attracted over $200 billion in assets, but the largest single equity mutual fund is the American Growth Fund with assets of $185 billion.14 One of the attractions of index funds is their extremely low cost. The total annual cost in the Vanguard 500 Index Fund is only 0.18 percent of market value (and as low as 2 basis points for large institutional investors). Because of proprietary trading techniques and interest income from loaning securities, Vanguard S&P 500 Index funds for individual investors have fallen only 9 basis points behind the index over the last 10 years, and its institutional index funds have actually outperformed the index.15 THE PITFALLS OF CAPITALIZATION-WEIGHTED INDEXING Despite their past success, the popularity of indexing, especially those funds linked to the S&P 500 Index, may cause problems for index 12 Five years before the Vanguard 500 Index Fund, Wells Fargo created an equally weighted index fund called “Samsonite,” but its assets remained relatively small. 13 Heather Bell, “Vanguard 500 Turns 25, Legacy in Passive Investing,” Journal of Index Issues, Fourth Quarter 2001, pp. 8–10. 14 Vanguard’s number includes assets of its 500 Index Fund open to both individuals and institutions. 15 The Vanguard Institutional Index Fund Plus shares, with a minimum investment of $200 million, have outperformed the S&P 500 Index by 7 basis points in the 10 years following the fund’s inception on July 7, 1997. 352 PART 5 Building Wealth through Stocks investors in the future.

The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series)
by Robert P. Baker
Published 4 Oct 2015

The bank can either act as the middleman or broker to execute trades on behalf of the client who has no access to counterparties or it can trade directly with the client and either absorb the trade or deal an equal and opposite trade (known as back-to-back) in the market place, making a profit by enjoying lower trade costs. 2. Proprietary trading Most investment banks have proprietary (or ‘prop’) desks with the aim of using the bank’s resources to make profit. The financial knowledge and skills base within the bank should enable it to understand the complexities of trades and take a realistic view on the future direction of the market in order to generate revenue for the bank. 3.

The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources
by Javier Blas and Jack Farchy
Published 25 Feb 2021

Glencore received ‘very timely reports from Russia farm assets that growing conditions were deteriorating aggressively in the spring and summer of 2010, as the Russian drought set in’, according to one bank report based on meetings with Glencore executives. ‘This put it in a position to make proprietary trades going long wheat and corn.’ 13 Between June 2010 and February 2011, the price of wheat more than doubled. Glencore was perfectly positioned to profit from the crisis it had played a role in stirring up. The company’s agricultural trading unit reported earnings of $659 million in 2010, the best year it had ever had and well above the earnings of Glencore’s oil and coal traders combined. 14 Of course, the drought would have devastated the Russian crop regardless of Glencore’s statements or Moscow’s decision to impose a ban.

A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History
by Diana B. Henriques
Published 18 Sep 2017

By 11 a.m. in New York, most of the stocks on the Big Board were open for trading, and there was a brief rally. After forty minutes, though, it was snuffed out. With the S&P 500 futures still dropping in Chicago, the Dow now sank under wave after wave of sell orders from all kinds of professional investors—mutual fund managers, index arbitrageurs, and Wall Street’s own proprietary trading desks. * * * BY THEN, SEC chairman David Ruder had returned to his office from the Mayflower Hotel after giving a half-hour speech at a conference there sponsored by the American Stock Exchange. Needless to say, it had been an uneasy audience; people were slipping out to the pay phones in the hall to check on the market.

Superclass: The Global Power Elite and the World They Are Making
by David Rothkopf
Published 18 Mar 2008

Trends in the financial community aside, for the past several decades one of the surest answers to that question has been Goldman Sachs. Since its founding in 1889, Goldman has grown to be the most respected name on Wall Street. The firm’s annual revenues are now heading toward the $70 billion level, primarily as a result of its incredibly profitable proprietary trading business and its leadership in investment banking. The firm earned almost $10 billion in 2006. Its office tower at 85 Broad Street in New York City and satellites worldwide house a remarkably privileged group of approximately thirty thousand employees. How privileged? The average employee makes $622,000 a year.

The Best Business Writing 2013
by Dean Starkman
Published 1 Jan 2013

Now these investments are absolutely 100 percent without any doubt whatsoever “proprietary” in the sense that you have bought them with money and hope for them to pay you back with interest, as opposed to hoping to sell them immediately to a customer. And there is a thing called the Volcker Rule intended to prohibit “proprietary” trading. So this portfolio violates the Volcker Rule, right? No, not at all. The Volcker Rule applies to proprietary positions held in the trading book and intended to be sold within sixty days. As a rough cut, it appears that the CIO positions are mostly longer-term, which is what you’d expect from a bank investing its deposits that would otherwise be put in three-to-seven-year corporate loans or thirty-year mortgages.1 Okay so now you’re JPMorgan and you’ve got about $375 billion worth of securities in the CIO—alongside some $700 billion of loans (page 87 of the 10-Q), of which $115bn are in your commercial bank (lending to businesses—page 28), $70bn are in your investment bank (lending to bigger businesses—page 16), $240bn are in retail (basically mortgages and stuff—page 18), and $187bn are in card services and auto (credit cards, car loans, student loans—page 25).

Why We Can't Afford the Rich
by Andrew Sayer
Published 6 Nov 2014

Particularly through interest and other debt charges, the sector draws a large rentier income from its control of assets and its licence to create credit money.5 Furthermore, intermediary functions provide extensive scope for ‘value-skimming’: ‘investors’ pay experts in banks, brokers, fund managers, lawyers and other specialists, who are in a position to exploit their superior knowledge relative to clients and skim significant gains for themselves. As well as providing financial services for clients, financial institutions strategically buy and sell assets themselves, using their own funds to make profits; this is variously called ‘proprietary trading’ or ‘investing’, or indeed speculating. Wishful thinkers, inspired by Adam Smith’s homely tale of how butchers, bakers and brewers could produce beneficial effects for all in pursuing their self-interest in markets (because it is in their interest to keep their customers happy), assume that this cannot be a problem.

The Power of Gold: The History of an Obsession
by Peter L. Bernstein
Published 1 Jan 2000

The chief motive of the Genoese in issuing the genoin was commercial, but they also understood that economic power and political power mutually enhance each other. Indeed, within ten years of the introduction of their golden currency, Genoese power had persuaded the Latin rulers of Constantinople that the proprietary trading privileges held by the Venetians should be transferred to Genoa. The Genoese then used their base in Constantinople to extend their trade and influence into northern Persia, the Crimea, and the farthest shores of the Black and Caspian Seas. Soon they were venturing into the upper Nile and exploring the Sudan and the Niger River basin.

The Finance Curse: How Global Finance Is Making Us All Poorer
by Nicholas Shaxson
Published 10 Oct 2018

They also simply had to operate out of swanky offices in exclusive areas like Mayfair. They would play mind games too. ‘They put on this big show,’ the banker continued. ‘They will make you wait for six months just to get an “exclusive” meeting with their sales people.’ They would shroud their proprietary trading strategies in mystery, a modern version of the lure to investors of the South Sea Bubble in the eighteenth century, where the company behind the scam offered a once-in-a-lifetime chance to invest in ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’.

The Unwinding: An Inner History of the New America
by George Packer
Published 4 Mar 2014

Markets were a buy surprisingly quickly, and they were right—the attacks didn’t change that much. The airlines were fucked, but not necessarily that much worse than after four terrible plane crashes. The Fed kept cutting rates. Before long, a financial boom was on. In 2004, Kevin left his safe and boring job to join the proprietary trading desk at a big European bank, with zero job security and huge potential—one of the ballsier and more correct decisions of his life. The European bank was about to get into collateralized debt obligations. The stock market determined the size of your apartment and whether you had a Viking stove—who was rich and who wasn’t.

The Asylum: The Renegades Who Hijacked the World's Oil Market
by Leah McGrath Goodman
Published 15 Feb 2011

“I wanted to make real money, but I didn’t want to end up neglecting my family or leaving close friends behind while I got fat and grew old. I didn’t want to work around the clock, eat at my desk, and lose my identity. Vinnie made it seem like that was possible.” After becoming a Nymex trader, Viola also dabbled in other businesses, running some community banks in Dallas and starting up proprietary trading shops active in the New York and London energy markets. After taking the chairmanship, he even invested in the Nets basketball team alongside real-estate developer Bruce Ratner, who’d worked on the construction of the Nymex building that had generated so much controversy. The two men moved the team from New Jersey to Viola’s hometown of Brooklyn, with Viola bringing in other investors from Nymex—most notably, bestselling mystery romance novelist Mary Higgins Clark, whose daughter Patty Clark Derenzo was Viola’s secretary.

Rentier Capitalism: Who Owns the Economy, and Who Pays for It?
by Brett Christophers
Published 17 Nov 2020

This intervention had a strongly positive effect on asset prices: Philip Bunn and his colleagues at the Bank have estimated that, without QE, real prices of equities listed on the London Stock Exchange would have been some 25 per cent lower in 2014 than they actually were.69 We can see the concomitant rentier gains in Figure 1.4. Having declined to only a sliver of overall sector income in 2007, and then gone deeply into the red in 2008, income from UK-based banks’ proprietary trading activities quickly recovered to robust levels once the effects of QE had kicked in, exceeding £10 billion in each of the four years beginning in 2010. With only one partial exception (fees and commissions), all of the non-interest-based categories of bank income charted in Figure 1.4 derive, like interest, from asset ownership – only in these cases, of course, the rentier exploits qualities of those assets other than their interest-bearing potential.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

In recent years, the profits that dealers earned by servicing their clients would not have been possible if not for their market-making activities. In other words, some of the revenues that dealers earned occurred solely because they took positions that facilitated their client’s transactions. Here, there is a big difference between principal trades, which dealers take on in order to facilitate their clients, and proprietary trades, which are used for speculation. Proprietary Products When the glamour of doing big deals in governments, corporates, agency paper, or money markets is stripped away, running a dealership is not so different from running a supermarket: a dealer’s competitors all have pretty much the same products at pretty much the same price.

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In return for the protection, the protection buyer makes periodic payments to the protection seller until the maturity date of the contract or until a credit event occurs. Typical terms for CDSs are for five years. Dealers have profited trading the spreads on CDSs, particularly banks, which are the biggest buyers and sellers in the CDS market.2 Insurance companies rank second, followed by securities firms and hedge funds. Proprietary trading desks at some of the larger dealers 2 Jorge A. Chan-Lau and Yoon Sook Kim, “Equity Prices, Credit Default Swaps, and Bond Spreads in Emerging Markets,” The International Monetary Fund, Working Paper, August 2004. FIGURE 10.1 Credit default swap have also become active players, making bets—usually hedged—in the CDS market on the gyrations in credit spreads.

Money and Government: The Past and Future of Economics
by Robert Skidelsky
Published 13 Nov 2018

Britain already has two public investment banks – the Green Investment Bank and the British Business Bank – but they have no power to borrow, crippling their investment potential. 10 See Atkins, et al. (2017). 11 https://mainlymacro.blogspot.com/2018/06/a-new-mandate-for-monetarypolicy.html. 12 Galbraith (2017). 13 The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed in 2010. Based on the so-called Volcker rule, it bans proprietary trading – i.e. using customer deposits to make investments on behalf of the banks’ proprietors and owners – for deposit-taking banks. The 2013 Financial Services Act implemented the report of Sir John Vickers, which proposed ‘ring-fencing’ the retail from the investment departments of banks, without separating ownership.

The Snowball: Warren Buffett and the Business of Life
by Alice Schroeder
Published 1 Sep 2008

What he was doing was trying to align the way people were paid at Salomon with the interests of shareholders, but his concern about compensation was just one aspect of his fundamental objection to a business in which almost every department had some sort of inherent conflict of interest with its customers. And without decimating Salomon by jettisoning everything but proprietary trading, he could not do much about that. But even by 1991, the Wall Street Journal and the New Republic1 took note of his straddling of two worlds, and both ran stories pointing out the disparities between them. The mismatch between Buffett’s representation of himself as a middle-class Midwesterner who had woken up in Oz and the elephant-bumping in which he routinely engaged with his collection of jumbo-dumbo celebrity friends only heightened the press’s eagerness to do some debunking.

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Linda Grant, “The $4-Billion Regular Guy.” Buffett hosannaed Gutfreund in his shareholder letters as well. 5. The principal conflicts inherent in Salomon’s business were the undisclosed bid-ask spread that Buffett had objected to while working for his father’s firm in Omaha, the conflict between proprietary trades for the firm’s account alongside customer trades, the investment banking business built off equity research stock ratings, and the arbitrage department, which could trade on the firm’s merger deals. As a board member who made Berkshire’s investment decisions, Buffett says he either recused himself from discussions involving deals or did not invest on information he had, yet his board membership did create the appearance of a conflict of interest. 6.

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't
by Nate Silver
Published 31 Aug 2012

Although some studies (like mine of mutual funds on E*Trade) seem to provide evidence for Fama’s view that no investor can beat the market at all, others are more equivocal,87 and a few88 identify fairly tangible evidence of trading skill and excess profits. It probably isn’t the mutual funds that are beating Wall Street; they follow too conventional a strategy and sink or swim together. But some hedge funds (not most) very probably beat the market,89 and some proprietary trading desks at elite firms like Goldman Sachs almost certainly do. There also seems to be rather clear evidence of trading skill among options traders,90 people who make bets on probabilistic assessments of how much a share price might move.* And while most individual, retail-level investors make common mistakes like trading too often and do worse than the market average, a select handful probably do beat the street.91 Buy High, Sell Low You should not rush out and become an options trader.

The Power Law: Venture Capital and the Making of the New Future
by Sebastian Mallaby
Published 1 Feb 2022

Sequoia’s success was emblematic of a wider shift in finance in this period: from the East Coast to the West Coast, from public capital markets to private ones, from financial engineering to technology. In the wake of the 2008 financial crisis, regulators forced the famous banks on Wall Street to take less risk; their lucrative proprietary trading desks were more or less shuttered. The Fed’s policy of quantitative easing added to the banks’ woes: their core business of borrowing cheap short-term money and lending it out long term ceased to earn much of a “spread,” because long-term interest rates were held down by central bankers. Other East Coast money shops were similarly constrained.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
by William D. Cohan
Published 15 Nov 2009

In the car, Cayne and Spector called Fisher at the Fed and told him not to proceed alphabetically through the list of banks asking them to support the plan to save LTCM. By this time, the effort by Buffett, Goldman Sachs, and Hank Greenberg, at AIG, to buy out the partners of LTCM for $250 million and then inject $4 billion into the firm while making LTCM part of Goldman's proprietary trading business had been rejected. “Now we get to the meeting,” Cayne said. “Herb Allison is running the meeting. He said, ‘All those things fell through. The things with Buffett and with Hank Greenberg and with Goldman, they all fell through. I'd like to know where we stand with everybody. Bankers Trust, are you with us?'

Too big to fail: the inside story of how Wall Street and Washington fought to save the financial system from crisis--and themselves
by Andrew Ross Sorkin
Published 15 Oct 2009

“This is a bank,” Pandit said. “And a bank takes deposits and a bank has a prudency culture. I cannot envision a bank taking its deposits and investing them all in hedge funds. I know that’s not what Goldman is, but the perception is that they’d be taking deposits and putting them to work against a proprietary trade. That can’t be right philosophically!” Having dispensed with pushing Goldman and Citigroup together, Geithner moved on to his next idea: merging Morgan Stanley and Citigroup. Pandit had been considering that option, too, and while he was more predisposed to merging with Morgan Stanley, he still was reluctant.

Founders at Work: Stories of Startups' Early Days
by Jessica Livingston
Published 14 Aug 2008

Through 2004, I kept working on it and started to get press and lots of users. By the end of 2004, I had 30,000 users. Livingston: How were the users finding out about it? Schachter: People were telling each other about it. Livingston: You were at Morgan Stanley this whole time, right? What were you doing there? Schachter: I was doing data mining and proprietary trading algorithms. Livingston: Why did you choose not to focus full-time on del.icio.us and what finally tipped the scale? Schachter: The economics didn’t make sense. It still made sense to keep the day job. But in late 2004/early 2005, my group at Morgan Stanley began to come apart. There were a bunch of people leaving, so it was a natural time to leave.

The Last Tycoons: The Secret History of Lazard Frères & Co.
by William D. Cohan
Published 25 Dec 2015

For about EU300 million, over time Bollore accumulated a 31 percent stake in Rue Imperiale, which indirectly owned a right to 15.8 percent of Lazard's profits. But as it turned out, several years before Bollore made his investments in Rue Imperiale, Jon Wood, an even cleverer Englishman responsible for proprietary trading at Union Bank of Switzerland, had the very same idea to buy into the publicly traded Lazard holding companies. "Michel David-Weill and his cronies have held back corporate France for years," Wood said. "They really are awful, egotistical people who wouldn't give money to a person to buy a loaf of bread."