Prop trading
Proprietary ('prop') trading involves banks risking their own capital to make money.
Banks usually trade shares for one of three reasons. First, they may be acting as a broker to a client an institution such as a pension fund or an individual. Or the bank may be acting as a market maker buying and selling securities to fulfil its obligation to an exchange in order to allow other investors to trade.
However, proprietary trading involves banks risking their own capital to make money. They may trade equities, but also bonds, currencies or commodities. Prop trading is pure speculation and can trigger big profits or losses. For that reason critics argue that it should be split away from much safer activities, such as accepting deposits and making loans, if banks are to retain the right to future taxpayer-funded bail-outs.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
What are wealth taxes and would they work in Britain?
The Treasury is short of cash and mulling over how it can get its hands on more money to plug the gap. Could wealth taxes do the trick?
-
UK bank stocks are no bargain – here's a safer alternative
Opinion Britain's banking sector faces severe political risks. Switch into this global financials trust instead, says Max King