Proprietary Trading

C

cigarno

It has been said that when a financial services firm trades both as agent in facilitating customer orders and as principal for the firm, conflicts of interest may arise in several ways. Obviously, a firm's proprietary desk trading ahead of pending customer orders is probably the first conflict of interest.
Well how does that hurt the customer and benefit the firm?
 
a bank or broker trading their own money isn't the problem..it's when the bank/broker trades with clients money or FED's money that is the problem.

the firm or market maker is always on the other side of trade..the problem is the information the broker has that the client doesn't have or 'frontrunning' clients...trading on client information is an ethical issue...it's same as inside information...information is not known by everybody. the client or everybody should have the same market information which is the principal of insider or frontrunning regulations but it's rarely enforced or hard to enforce even market manipulation is unenforceable.

that is the reason for banning banks/brokers/investment banks from using client or money from FED money to trade their own account. That volcker rule would even ban banks from lending to private hedge funds and prop firms. banks/investment banks are not lending or financing business or gov't ,,,they are using the money to trade their own accounts for their own use and make more money doing it...why lend money at 7% interest rate when you can make 25% using the money yourself




Quote from cigarno:

It has been said that when a financial services firm trades both as agent in facilitating customer orders and as principal for the firm, conflicts of interest may arise in several ways. Obviously, a firm's proprietary desk trading ahead of pending customer orders is probably the first conflict of interest.
Well how does that hurt the customer and benefit the firm?
More...
 
Thank You......But still the question remains......the quote says "Obviously, a firm's proprietary desk trading ahead of pending customer orders is probably the first conflict of interest."
example: If I place an order to buy or sell 100 shares of Citibank and my broker places the same order for its own book ahead of my order. HOW does that hurt me?
 
They don't really front run retail customers rather than more huge institutional block orders. But if it is a huge volume of retail customers wanting to buy up C they could possibly fill their book first and give you a remaining higher price for your fill.
 
while front-running is probably rampant on some desks, the majority of profits are from real arb and directional trades.
 
if Im not mistaken the prop desks at big IB's are supposed to be in different areas so that they have no idea what the firms clients money is working on to avoid all conflicts of interest and to prevent illegal front running.
 
Quote from cigarno:

If I place an order to buy or sell 100 shares of Citibank and my broker places the same order for its own book ahead of my order. HOW does that hurt me?
More...

If they beat you to the only shares at the best price then you are going to pay a higher price.
 
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