Can anyone give me a clear explanation on “Proprietary trading” - and why prohibition of it while a firm is in possession of material nonpublic info may be inappropriate? - What kind of signal this may send to the market? - Why firms should take the contra side of only unsolicited customer trades?
Proprietary trading is principal trading using the firms own money. I.e. Goldman Sachs puts up $100m to buy and sell investments and keeps the profit. This is as opposed to Agency trading which is for client trades and normally uses no firm money. However, some client facilitation may involve taking a temporary principal position. Guidance from the CFA institute is to stop proprietary trading when in possession of MNPI because a firm may not be certain that those who are trading are entirely clean from the MNPI (although in practice most firms wall-off the MNPI with information barriers). However, market-making and client facilitation activities are normally free to continue to avoid tipping off the market that there is something happening with the relevant company. Also taking the contra-side of an unsolicited client trade is purely executing a client order