Identifying the Characteristics of Banks Proprietary Trading Style

Abstract

Bank’s proprietary desks and hedge funds have similar investment styles, goals and dynamics. We apply bank related factors, trend following strategies, and active managers benchmarks in order to understand the style and especially the dynamics of banks proprietary trading desks decisions. We find that bank traders are not trend followers, but are positively correlated to macro hedge funds and above all are short volatility strategies, meaning selling options (calls and puts) with bonds as the major underlying. We conclude that Asset Based Style (ABS) factors are an alternative approach for regulators and other market participants to understand banks proprietary market exposure.