SERVING THE QUANTITATIVE FINANCE COMMUNITY

• 1
• 4
• 5
• 6
• 7
• 8
• 9

daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: deepdish7Well this "bundling" should also be regarded as prop trading then, if the dealer ends up with residuals on its balance sheet. but it doesn't mean that all CMO CDO and MBS should be banned, it's a wrong logicwe can disagree on the former. but who is saying that they should be banned ? is it Dr Taleb ?
knowledge comes, wisdom lingers

trackstar
Posts: 27426
Joined: August 28th, 2008, 1:53 pm

### JP Morgan- 2 billion trade loss

Not necessarily prop trading. This was product creation, to be marketed and sold to the customers of the bank.Proprietary Trading is the bank entering the market and trading on its own behalf.Note the difference between Market Making and Prop Trading.Not to say the banks did not also trade these instruments on their own behalf, but that is not the whole story.We need a Venn diagram from Traden.Circle A is all mortgage related structured products and circle B (inside A) is prop trading of such products!
Last edited by trackstar on May 22nd, 2012, 10:00 pm, edited 1 time in total.

ppauper
Posts: 70239
Joined: November 15th, 2001, 1:29 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: trackstarNot necessarily prop trading. This was product creation, to be marketed and sold to the customers of the bank.Proprietary Trading is the bank entering the market and trading on its own behalf.Not to say the banks did not also trade these instruments on their own behalf, but that is not the whole story.with a lot of these products, the bank is taking the other side of the trade

frenchX
Posts: 5911
Joined: March 29th, 2010, 6:54 pm

### JP Morgan- 2 billion trade loss

The real problem is that it's almost impossible to distinguish hedging and speculative bet. Regulators see "Speculative bets" everywhere while banks always shout it is "portfolio hedging".

trackstar
Posts: 27426
Joined: August 28th, 2008, 1:53 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: ppauperQuoteOriginally posted by: trackstarNot necessarily prop trading. This was product creation, to be marketed and sold to the customers of the bank.Proprietary Trading is the bank entering the market and trading on its own behalf.Not to say the banks did not also trade these instruments on their own behalf, but that is not the whole story.with a lot of these products, the bank is taking the other side of the tradeSo you are in the camp of "It is all prop trading"?

ppauper
Posts: 70239
Joined: November 15th, 2001, 1:29 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperQuoteOriginally posted by: trackstarNot necessarily prop trading. This was product creation, to be marketed and sold to the customers of the bank.Proprietary Trading is the bank entering the market and trading on its own behalf.Not to say the banks did not also trade these instruments on their own behalf, but that is not the whole story.with a lot of these products, the bank is taking the other side of the tradeSo you are in the camp of "It is all prop trading"?indeed, it is in part prop trading.If they sold both sides of the trade to other parties, that would be straight product creation

trackstar
Posts: 27426
Joined: August 28th, 2008, 1:53 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: ppauperQuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperQuoteOriginally posted by: trackstarNot necessarily prop trading. This was product creation, to be marketed and sold to the customers of the bank.Proprietary Trading is the bank entering the market and trading on its own behalf.Not to say the banks did not also trade these instruments on their own behalf, but that is not the whole story.with a lot of these products, the bank is taking the other side of the tradeSo you are in the camp of "It is all prop trading"?indeed, it is in part prop trading.If they sold both sides of the trade to other parties, that would be straight product creationYes, definitely "in part" = "all" in some situations. Hopefully this clears things up for deepdish7.Now the regulators should sit in on a finance 102 seminar also!
Last edited by trackstar on May 22nd, 2012, 10:00 pm, edited 1 time in total.

rmax
Posts: 6080
Joined: December 8th, 2005, 9:31 am

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: ppauperindeed, it is in part prop trading.The example you give is making best use of intimate knowlege of the market to know when the cheapest time to hedge risk will occur to realise benefits for the shareholder.Prop trading is just betting the farm on Red.

frenchX
Posts: 5911
Joined: March 29th, 2010, 6:54 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: rmaxQuoteOriginally posted by: ppauperindeed, it is in part prop trading.The example you give is making best use of intimate knowlege of the market to know when the cheapest time to hedge risk will occur to realise benefits for the shareholder.Prop trading is just betting the farm on Red.That's the point. "Yes I was hedging the risk my regulator. portfolio hedging I swear. Ok I knew the house will burn so I wanted to be protected against it. Ok I lock in a profit on my customer back but it was a hedging profit (I love the word) not a speculative one".

deepdish7
Posts: 45
Joined: October 16th, 2010, 6:57 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: daveangelQuoteOriginally posted by: deepdish7Well this "bundling" should also be regarded as prop trading then, if the dealer ends up with residuals on its balance sheet. but it doesn't mean that all CMO CDO and MBS should be banned, it's a wrong logicwe can disagree on the former. but who is saying that they should be banned ? is it Dr Taleb ?you can disagree, but it would still be prop trading effectively. if the bank isn't selling the product within 1 week say after general sale of securities, then it's pure prop trading, whatever you call it. and it should obviously be banned. but what should not be done in my opinion, is moving derivatives to exchanges, clearing houses, etc. it would just kill those markets which are not dangerous by themselves, but only dangerous when people in some CIO department of the bank start 'hedging'

daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: frenchXQuoteOriginally posted by: rmaxQuoteOriginally posted by: ppauperindeed, it is in part prop trading.The example you give is making best use of intimate knowlege of the market to know when the cheapest time to hedge risk will occur to realise benefits for the shareholder.Prop trading is just betting the farm on Red.That's the point. "Yes I was hedging the risk my regulator. portfolio hedging I swear. Ok I knew the house will burn so I wanted to be protected against it. Ok I lock in a profit on my customer back but it was a hedging profit (I love the word) not a speculative one".Is this comment based on your experience or some comment you read on the internet ?
knowledge comes, wisdom lingers

frenchX
Posts: 5911
Joined: March 29th, 2010, 6:54 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: daveangelQuoteOriginally posted by: frenchXQuoteOriginally posted by: rmaxQuoteOriginally posted by: ppauperindeed, it is in part prop trading.The example you give is making best use of intimate knowlege of the market to know when the cheapest time to hedge risk will occur to realise benefits for the shareholder.Prop trading is just betting the farm on Red.That's the point. "Yes I was hedging the risk my regulator. portfolio hedging I swear. Ok I knew the house will burn so I wanted to be protected against it. Ok I lock in a profit on my customer back but it was a hedging profit (I love the word) not a speculative one".Is this comment based on your experience or some comment you read on the internet ?Not to laugh at you but for this time (a rare one you may say) it's more based on a past experience... But not with JP Morgan. I was in a meeting about Counterparty risk with bankers from one side and regulators in the others and an audience just to enjoy the show. I wasn't disappointed, the ticket was cheaper that a cinema one and I got all the sterotypes (for bankers but also for regulators). Actually it was interesting but as you may guess no consensus rose and everybody left with his clear view on the subject, just the same before attempting the debate.

trackstar
Posts: 27426
Joined: August 28th, 2008, 1:53 pm

### JP Morgan- 2 billion trade loss

It is useful to keep the two discussions separate for a moment. Entities on the one side and market making/hedging/speculation on the other.There are market making entities and there are proprietary trading entities. We can see that there is a shade of grey between them.However, in general let's say that market making activities have a clear advantage and distinct value in providing liquidity to all market participants and that the profits generated by their activities are more like fees for services rather than speculative gains. I know some people might argue that the profits are actually rewards for warehousing risk, but that may imply a longer holding period than is the reality.Example:I am planning a trip to Europe and want to sell 100 shares of Exxon Mobil to cover my expenses. Obviously I do not have to wait for an individual investor to come along, buy my 100 shares, send me a check, I send him the shares, and (with all the uncertainty there) we each have to pay for some kind of insurance regarding the fulfillment of the agreement. His check cannot bounce and I cannot forget to send the shares.This would be absurd. Instead - I sell through my electronic exchange, maybe a big bank is buying in a matter of seconds and they will do whatever they want with those XOM shares today, tomorrow, or a year from now.Maybe I sell at $85 and they turn around and sell at$85.10. I do not care; their role in the transaction is convenient for me.Now think about scale. If I want to sell 1,000 shares or 10,000 shares immediately - now we really are starting to need market mechanisms that do not involve private individuals. Otherwise, I may have to wait weeks to sell my shares and I cannot stay in the fancy hotel of my choice in London. I do not see a problem with I Banks acting as market makers and earning some profits along the way; they are, in effect, large, well funded parking lots.Proprietary trading is intuitively felt to be of a more aggressive, speculative nature, but it still plays a role in producing an efficient (and liquid) market. Let's say that one of the prime objectives of the prop trader is to find arb opportunities and exploit them.Take a simple view: If enough of them do this, the market will eventually converge to the "right" prices for things.This too, is desirable, and do they not deserve a reward for this riskier service?The regulators should tread very carefully here, is my feeling. If someone is really interested, maybe post a link to the (proposed) legislation on prop trading and we can discuss it.But I think if you are not completely anti-profit, anti-free market, you have to be concerned with the heaviness of the government hand here in the separation and regulation of mainstream customer-oriented I-banking and prop trading.
Last edited by trackstar on May 22nd, 2012, 10:00 pm, edited 1 time in total.

daveangel
Posts: 17031
Joined: October 20th, 2003, 4:05 pm

### JP Morgan- 2 billion trade loss

Quote Not to laugh at you but for this time (a rare one you may say) it's more based on a past experience... you mean "laugh with you"... I assumed that you had been conversing with Jerome Kerviel
knowledge comes, wisdom lingers

frenchX
Posts: 5911
Joined: March 29th, 2010, 6:54 pm

### JP Morgan- 2 billion trade loss

QuoteOriginally posted by: daveangelQuote Not to laugh at you but for this time (a rare one you may say) it's more based on a past experience... you mean "laugh with you"... I assumed that you had been conversing with Jerome KervielNo no. But seriously I would have enjoyed such a meeting. Jerome Kerviel, Fabrice Tourre and Bruno Iksil should create a new superleague of superheroes called "The ex superstar french traders who believed they could rule the world and where f*cked in the back by their bank".
Last edited by frenchX on May 22nd, 2012, 10:00 pm, edited 1 time in total.