Faculty of Economics and Business Administration Publications Database

Is Proprietary Trading Detrimental to Retail Investors?

Fecht, Falko
Karabulut, Yigitcan
Volume: 73
Number: 3
Pages: 1321 - 1361
Month: February
ISSN-Print: 0022-1082
Link External Source: Online Version
Year: 2018
Keywords: Conflict of interest; Universal banks; Proprietary trading; Retail investment; Retail banking

We study the conflict of interest that arises when a universal bank conducts propri- etary trading alongside their its retail banking services. Our dataset contains the stock holdings of every German bank and those of their corresponding retail clients. We investigate (i) whether banks directly 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.