Flow trading

In finance, flow trading occurs when a firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, with funds from a client, rather than its own funds.^[1]

A stock trading desk

Flow trading can be a significant source of profits for investment banks.^[2][3] Engaging in flow trading can also boost a firm's own proprietary trading profits via access to information on client activities. Additionally, the firm can often facilitate client trades by serving as the counterparty, thus profiting from the bid–offer spread.^[3][4]

In 2011, the Volcker Rule aimed to limit flow trading businesses from taking proprietary bets.^[5]

References

1. Rosenstreich, Peter (2005). Forex Revolution: An Insider's Guide to the Real World of Foreign Exchange. p. 85. ISBN 0-13-148690-X.
2. Augar, Philip (2005). The Greed Merchants: How the Investment Banks Played the Free-Market Game. p. 111. ISBN 1-59184-087-2.
3. v.d. Wel, M. (2005). Riskfree Rate Dynamics: Information, Trading, and State Space Modeling. p. 43. ISBN 9789051707694.
4. Williams, Mark T. (2010). Uncontrolled Risk. p. 74. ISBN 978-0-07-163829-6.
5. Harper, Christine (10 October 2011). "Volcker Rule May Cut Fixed-Income Revenue 25%, Hintz Says". Bloomberg.com.