According to Investopedia, proprietary trading is, “When a firm trades for direct gain instead of commission dollars. Essentially, the firm has decided to profit from the market rather than from commissions from processing trades.” In simpler terms, the bank takes out large bets using its own money. The bank buys and sell as an independent entity, competes with its own customers, and puts its own capital at risk. While the banks are motivated by huge returns, the banks are trading against their own customers and causing market volatility. Goldman Sachs took advantage of deregulation during the 1980s and 1990s and got into trouble by taking the practice to an extreme. The resulting volatility in earnings leads to the possibility of huge differences in earnings from one earnings period to the next. This is according to the UK Telegraph. Financial Times describes one type of proprietary trading, called “pure” proprietary trading or pure prop. This goes on when the trade is done for the bank’s own profit and has no relation to client business. In other words, there is a “firewall” between the trades and the rest of the bank. Pure trading generates a fraction of total income from trading. Goldman Sachs claims that pure proprietary trading brings in approximately ten percent of revenues. “Flow business” is another name for proprietary trading where the bank puts its own capital at risk by offering to buy what a client wants to sell, or to sell what a client wants to buy. In the U.S., the Volker Rule, named after former Fed Chairman Paul Volcker, is a part of the Dodd-Frank Act and must be implemented by July 21. According to Bloomberg, the Volker Rule would prohibit banks from trading for their own accounts. The banks could still do market creation and hedging by making short term trades. The goal of the rule was to reduce risky trading that plays with deposit insurance and borrows against the Fed discount window. This extra money drives up the prices for market instruments, making everyone who is not a bank pay more. Republicans in the House are citing risks to the job creation that they have never managed to get done, the complexity of a law that they cannot understand, and risks to U.S. banks competitiveness with banks from other nations who do not have the same restrictions. In the UK, Chancellor of the Exchequer George Osborne complained that the Volker restrictions would negatively affect global markets. According to Bloomberg, this would “…make it more difficult, riskier and costlier for countries such as the UK to issue and distribute their debt.” The bottom line is that proprietary trading does nothing to create jobs or resolve the debt crises that past prop trade excesses have caused. Opponents are not offering any lucid answers as to how proprietary trading helps to resolve bloated debts that were caused by proprietary trading. Proponents want regulation that will stop the banking industry from causing more damage, and to shut the prop trading feeding frenzy down. This may be a painful process for those who offer no end to their money making, debt building schemes, but it has to be done. Category:Home › Other • Pomegranates: A newly discovered superfood • Where did the joke why did the chicken cross the road come from and why is it funny? • Can mothers diagnosed with bipolar disorder make good parents? • Spiritual evolution of human consciousness • Tips for getting a college basketball scholarship • Living with Pseudotumor cerebri (PTC) • Caring for the caregiver • Technologys impact on society