We've wondered before whether it is really possible to strictly differentiate proprietary trades from client trades. It may have been a tad easier before the Volcker Rule, if the bank ran separate proprietary trading units.

But when it comes to market making, there's a whole lot of agency activity going on that requires the market maker to put up its own capital. If a big client wants to unload a position, the broker-dealer is going to buy it up and then sell it off, unless it wants to hang onto to risk, which it often does.

So the process of market making has always been used to make proprietary trading--they go hand in hand. Even the old specialists on the NYSE floor were expected to make markets and make money.

The New York Times notes two examples. Several insurance companies wanted to bet on market volatility via Goldman Sachs, who took the other side of the bet. It turned into a loss of $250 million. Goldman could have tried to lay off the bet, but it was happy with the risk. JPMorgan took the other side of client bets on rising coal prices. It worked out well for clients but stuck JPMorgan with a $130 million loss.

The Volcker Rule may shut down prop trading units, but the practice will continue.

For more:
- here's the article

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