Is Proprietary Trading Detrimental to Retail Investors?
58 Pages Posted: 18 Mar 2012 Last revised: 18 Aug 2017
Date Written: July 3, 2017
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: Suggested Citation