Goldman Sachs Proprietry trading

[muqian]

Hi All,

I read Goldman Sachs 2012 10-K report and am confused whether proprietary trading is devision "institutional client services"or devision "Investing & lending".

To me, it should be in ""institutional client services" with reported revenue of $18 billion.
But the following article suggests that it is in "Investing & lending" with reported revenue of $5.9

http://finance.fortune.cnn.com/2013/01/16/goldman-sachs-earnings/
"
The bank took in nearly $6 billion from proprietary trading in 2012, even as more plain-vanilla lending revenue continues to grow."
"The company had $5.9 billion in revenue from so-called principal transactions, which are trades Goldman made for its own account. Much of that revenue could be going away soon though. Regulations passed after the financial crisis are expected to ban Goldman and other banks from making risky trades with its own money."

 

[C S]

Proprietary means for their own accounts, not clients. "Client services", as the term suggests, is for clients. "Institutional client services" means for clients that are well, institutions. Other terms are agency trading versus principal trading.

As you can see, it's more profitable to offer client services and take fees.

 

[muqian]

I understood that proprietary means using their own money.
My point is that "investing & lending" doesn't seem has anything to do with "trading", instead it has to do with investing (such as ICBC the largest bank in China) and lending.
"These activities include investing directly in publicly and privately traded securities and in loans".
"We have an investment in the ordinary shares of ICBC".

While "institutional client services" has the trading services. Besides, in this section, what it says in page5 looks like proprietary trading:
"At times we take the other side of transactions ourselves if a buyer or seller is not readily available and at other times we connect our clients to other parties who want to transact"

 

[C S]

I understood that proprietary means using their own money.
My point is that "investing & lending" doesn't seem has anything to do with "trading", instead it has to do with investing (such as ICBC the largest bank in China) and lending.
"These activities include investing directly in publicly and privately traded securities and in loans".
"We have an investment in the ordinary shares of ICBC".

While "institutional client services" has the trading services. Besides, in this section, what it says in page5 looks like proprietary trading:
"At times we take the other side of transactions ourselves if a buyer or seller is not readily available and at other times we connect our clients to other parties who want to transact"

Trading is all about investing. You get a long/ short position , it is an investment.

Trading can be on your behalf or a client's.

I don't think you understand what a brokerage does. For a good client especially, if you cannot match, you will take a position temporarily but liquidate it later. It's like in (pure) market making; you make $$ off the spread, not inventory. But you will build up inventory and then that's extra risk you need to control. In execution, you make money off the fees. If you build up a position, that's a problem.

 

[JulianT]

Without having read the details of the 10k, principal transaction isn't necessarily prop trading. Certain activities such as equities, there is much more agency business, however in market making many markets, the dealer acts as a principal. Money can be made by book positioning, however, most of your money is made by bid ask spreads and turning over your book as fast as possible. Many such market making activities, in less liquid markets (think corporate or high yield bonds), require significant balance sheet usage, since buyers are harder to match with sellers at the same time, building inventory. You are buying and selling on the dealer's account, however, it is client driven business. The classification of such activities as prop trading demonstrates the ignorance of how a dealer operates.