What Is a Trading Book?

A trading book is the portfolio of financial instruments held by a brokerage or bank. Financial instruments in a trading book are purchased or sold for 🎐several reasons. For example, they might be bought or sold to facilitate trading actions for customers to profit from trading spread♑s between the bid and ask prices or to hedge against different forms of risk.

Trading books can✃ range in size froღm hundreds of thousands of dollars to tens of billions depending on the size of the institution.

Understanding a Trading Book

Most institutions employ sophisticated risk metrics to manage and mitigate risk in their trading books. Trading books function as a form of accounting ledger by tracking the securities held by the institution that are regularly bought and sold. Additionally, trading history information is tracked within the trading book by creating a simple way to revi𒀰ew the institution's previous activities of associated securities. This differs from a banking book as securities in a trading book are not intended to be held until maturity, while the securities in the banking book will be held long-term.

Trading books are subject to gains and losses as prices of the included securities change. Since these securities are held by the financial institution, and not by individual investors, these gains and losses impa🐼ct the financial fitness of the institution directly.

Impact and Examples of Trading Book Losses

The trading book can be a source of massive losses within a financial institution. Losses arise due to the extremely high degrees of leverage employed by an institution to build the trading book. Another source of trading book losses is disproportionate and highly concentrated wagers on specific securities or market sectors by errant or 澳洲幸运5官方开奖结果体彩网:rogue traders.

Trading book losses can have a cascading, global effect when they hit numerous financial institutions at the same time, such as during the Long-Term Capital Management (LTCM) collapse, the Russian debt crisis of 1998, and the 澳洲幸运5官方开奖结果体彩网:Lehman Brothers bankruptcy in 2008. The global 澳洲幸运5官方开奖结果体彩网:credit crunch and 澳洲幸运5官方开奖结果体彩网:financial crisis of 2008 was significantly attributable to the hundreds of billions of losses sustained by global 澳洲幸运5官方开奖结果体彩网:investment banks in the mortgage-backed securities portfolios held within their trading books. During that crisis, 澳洲幸运5官方开奖结果体彩网:Value at Risk (VaR) models were used to quantify trading risks in trading books. Banks transferred their risk from the banking book t♍o trading books because VaR values were low.

Attempts to disguise mortgage-backed security trading book losses during the financial crisis ultimately resulted in criminal charges being brought against a former vice president of Credit Suisse Group. In 2014, Citigroup Inc. purchased the commodity trading books held by Credit Suisse. Credit Suisse participated in the sale in response to regulatory pressure and their intent to lower their involvement in commodities investing.

The Bottom Line

A trading book is an accounting ledger used by a brokerage or financial institution to account for its portfolio, or all of its tradeable assets. Depending on the size of the institution, these portfolios can track billions of dollars in investments.