What does the trading business of a big bank do? One crude model might be: In the olden days, perhaps 20 years ago, the trading division did trading. It did customer facilitation trading (dealing, market making): buying securities that customers wanted to sell, selling securities that customers wanted to buy, using the bank’s balance sheet and collecting a spread for that service. And it did proprietary trading: buying securities that the bank wanted to buy (because it thought they would go up) and selling securities that it wanted to sell. There is some conceptual distinction between those businesses, but they are related; in either case, the bank’s traders used its balance sheet to buy and sell securities and took the risk that those securities might go down.
Since the 2008 financial crisis, that has become somewhat less true. In the US, proprietary trading, as a business for big banks, has been more or less outlawed for a decade by the Volcker Rule. Customer facilitation trading is still a big business, but it is widely believed that banks have scaled back their market making for a variety of regulatory and risk-appetite reasons: The Volcker Rule complicates market making, increased capital requirements have made it less economical for banks to use their balance sheets to trade securities, and the generally more boring and conservative culture of post-crisis banks has left them less interested in taking big trading risks. And so more of what the trading desks do now is matching up buyers and sellers without using the bank’s own balance sheet to buy and sell stuff.
