Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using depositors' money) to make a profit for itself.[1] Proprietary trading can create potential conflicts of interest such as insider trading and front running.
Proprietary traders may use a variety of strategies such as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, or global macro trading, much like a hedge fund.[2]
There are a number of ways in which proprietary trading can create conflicts of interest between a bank's interests and those of its customers.[3]
One example of an alleged conflict of interest can be found in charges brought by the Australian Securities & Investments Commission against Citigroup in 2007.[4]
Another source of conflicts of interest is potential front running, in which case the buy-side clients suffer from significantly higher trading costs. Front running per se is illegal, but there are circumstances under which a broker that operates a proprietary trading desk gains advantage over its clients based on inferences from order book data.[5]
Trader Nick Leeson took down Barings Bank with unauthorized proprietary positions. UBS trader Kweku Adoboli lost $2.3 billion of the bank's money and was convicted for his actions.[6] [7]
Armin S, a German private trader, sued BNP Paribas for 152m EUR because they sold to him structured products for 108 EUR each which were worth 54 00 EUR.[8]