Is Proprietary Trading Detrimental to Retail Investors?

58 Pages Posted: 18 Mar 2012 Last revised: 18 Aug 2017

See all articles by Falko Fecht

Falko Fecht

Frankfurt School of Finance & Management

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Yigitcan Karabulut

Frankfurt School of Finance & Management; CEPR

Multiple version iconThere are 3 versions of this paper

Date Written: July 3, 2017

Abstract

We study the conflict of interest that arises when a universal bank conducts proprietary trading alongside 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 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.

Keywords: Conflict of interest, universal banks, proprietary trading, retail investment, retail banking

JEL Classification: G30, G32

Suggested Citation

Fecht, Falko and Hackethal, Andreas and Karabulut, Yigitcan, Is Proprietary Trading Detrimental to Retail Investors? (July 3, 2017). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2024004 or http://dx.doi.org/10.2139/ssrn.2024004

Falko Fecht (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Yigitcan Karabulut

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

CEPR ( email )

London
United Kingdom

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