Is Proprietary Trading Detrimental to Retail Investors?

58 Pages Posted: 12 Mar 2011 Last revised: 15 Aug 2017

Falko Fecht

Frankfurt School of Finance & Management

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE

Yigitcan Karabulut

Rotterdam School of Management, Erasmus University (RSM); CEPR

Multiple version iconThere are 3 versions of this paper

Date Written: December 15, 2016

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 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? (December 15, 2016). Available at SSRN: https://ssrn.com/abstract=1783679 or http://dx.doi.org/10.2139/ssrn.1783679

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

Goethe University Frankfurt - Research Center SAFE ( email )

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

Yigitcan Karabulut

Rotterdam School of Management, Erasmus University (RSM) ( email )

Netherlands

HOME PAGE: http://https://sites.google.com/site/karabulutyc/home

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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