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.