Is Proprietary Trading Detrimental to Retail Investors?

Is Proprietary Trading Detrimental to Retail Investors?

  • FALKO FECHT
  • ANDREAS HACKETHAL
  • YIGITCAN KARABULUT

Article first published online: 2nd February 2018 DOI: 10.1111/jofi.12609

Abstract


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.

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