Do Proprietary Traders Provide Liquidity?

Whether proprietary traders provide or take liquidity, and how their behavior evolves over the business cycle and across stocks, remains at the center of an ongoing debate. Using a unique dataset from the NYSE, we document that proprietary traders concentrate their trades in large and liquid stocks, but even in these, their liquidity provision is minimal. When intermediary balance sheets are weak, proprietary traders do not provide any liquidity. Furthermore, proprietary traders do not increase their liquidity provision during periods of low stock returns, when liquidity dries up. Our evidence does not lend credence to the view that curbing proprietary trading harms stock liquidity provision.

Keywords: Liquidity, Proprietary Traders, Volcker Rule

JEL Classification: G12, G14, G18, G28

Suggested Citation: Suggested Citation

Bergman, Nittai and Kadan, Ohad and Michaely, Roni and Moulton, Pamela C., Do Proprietary Traders Provide Liquidity? (January 10, 2022). Swiss Finance Institute Research Paper No. 20-109, Available at SSRN: https://ssrn.com/abstract=3724327 or http://dx.doi.org/10.2139/ssrn.3724327