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Is Proprietary Trading Detrimental to Retail Investors?
Author(s) -
FECHT FALKO,
HACKETHAL ANDREAS,
KARABULUT YIGITCAN
Publication year - 2018
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12609
Subject(s) - business , portfolio , german , stock (firearms) , retail banking , stock trading , commerce , finance , stock market , mechanical engineering , archaeology , engineering , history , paleontology , horse , biology
We study the conflict of interest that arises when a universal bank conducts proprietary trading alongside its retail banking services. Our data set contains the stock holdings of every German bank and those of their corresponding retail clients. We investigate (i) whether banks sell stocks from their proprietary portfolios to their retail customers, (ii) whether those stocks subsequently underperform, and (iii) whether retail customers of banks engaging in proprietary trading earn lower portfolio returns than their peers. We present affirmative evidence for all three questions and conclude that proprietary trading can, in fact, be detrimental to retail investors.