Is Proprietary Trading Detrimental to Retail Investors?

40 Pages Posted: 21 Jun 2016

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: 2013

Abstract

We study a conflict of interest faced by universal banks that conduct proprietary trading alongside their retail banking services. Our dataset contains the stock holdings of each and every German bank and of their corresponding retail clients. We investigate (i) whether banks deliberately push stocks from their proprietary portfolios into their retail customer portfolios, (ii) whether those stocks subsequently underperform, and (iii) whether retail customers of banks with proprietary trading earn lower long-term portfolio returns than their peers. We present affirmative evidence on all three questions and conclude that proprietary trading can, in fact, be very detrimental to retail investors.

Keywords: conflict of interests, 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? (2013). Bundesbank Discussion Paper No. 42/2013, Available at SSRN: https://ssrn.com/abstract=2796935 or http://dx.doi.org/10.2139/ssrn.2796935

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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