JP Morgan reduces proprietary trading

On the front page of the Companies and Markets section of the FT last week there was an article indicating that JP Morgan was acting to reduce risk within their trading teams. If you read my section on Investment Banks (Article 5 ,page 22) you will see an analysis of how the Investment Banking industry looked at the top of the boom in 2006. I warned then that hard times might be just around the corner. However, I must admit that I had no idea just how quickly things would change. The joke of the advert for the "second-hand Ferrari" has come all too true for many bankers.

Now back to the FT article. It indicates that JP Morgan will be reducing proprietary trading with many job losses expected as a result. I should explain what this means. Proprietary trading is where the Investment Bank uses their own capital to take a trading position in the hope of making a significant financial gain.

For example:

They might think that the share price of Barclay's Bank has fallen too far.

So their traders will buy 1m shares in Barclay's for say £2.50.

If they are right and the share price rises to £3.50 in the next week or so they will make:

1m x £1 = £1m for the bank.

However, if instead the share price falls the bank will run up huge losses.

You should see that proprietary trading is just about the most risky thing that an Investment Bank does! So in these times of uncertainty we should not be too surprised to see the Investment Banks curtailing these activities.