What Do Bank Trading Desks Do?

Format:Print
| Language:English
| Pages:68

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). Despite having large inventories and earning large profits, bank trading desks bear little to no market risk. Risk is primarily idiosyncratic and diversifies across desks, resulting in high profitability, profits per unit of risk. 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.