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Proprietary trading: Safer figures against prop trading

Prop trading large part of revenues; Volcker Rule needs to go further

So proprietary trading does not add much to the bottom line for banks and the Volcker Rule will have little impact? The banks are not being entirely accurate in making this suggestion, according to data produced by a group of economists in the US.

Safer (the economists’ committee for stable, accountable, fair and efficient financial reform) released a paper in February disputing claims by US investment banking franchises that prop trading contributes only a small proportion of revenues.

Goldman Sachs is reported as claiming that its prop trading is just 10% of revenues.

Gerald Epstein, coordinator of Safer and a professor of economics at the University of Massachusetts, suggests that some banks are using the wrong figures to defend their claims. "They are pointing to principal transaction revenues as a percentage of total revenues, but using net revenues instead makes much more sense." The difference results in proprietary trading accounting for twice the percentage that banks claim. Principal transactions in 2008 for Goldman Sachs were 15.11% of total revenue, but 36.43% of net revenue. Morgan Stanley’s principal transactions were 5.09% of net revenues for 2008 compared with the 2% of total revenues that the bank has been highlighting.

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