What Do Bank Trading Desks Do?

Format:Print
| Language:English
| Pages:64

Abstract

Bank trading desks earn profits from intermediating customer trading volume. Across a broad set of asset markets, we document that the trading desks of large U.S. dealer banks behave as financial intermediaries that profit from toll-taking as in Duffie et al. (2005). Bank trading desks earn large profits, despite not bearing market risk in the asset markets for which they intermediate. Idiosyncratic risk borne at the desk level diversifies at the bank-level, resulting in bank-level trading profits having high Sharpe ratios. In the cross-section of large U.S. dealer banks, the profitability of trading desks differs, even within the same asset class and trading activity. Trading desks exhibit economies of scale, where profitability is increasing in trading desk size.