Is S&T at investment banks flow and agency?

External question — Personal Finance Stack Exchange Author: Sean Taylor Original post: https://money.stackexchange.com/questions/127679 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I just read about the Volcker Rule on Investopedia and it seems like prop trading, trading with the firm's own money, is explicitly forbidden in investment banks. Does all sales & trading at investment banks have to be flow trading or agency trading? Furthermore, I read that prop trading still exists in effect due to "creative market making". Can anyone explain what is meant by this? Also, what's the point of agency trading (trader at investment bank just executing orders on the behalf of a client) if online brokers like E-Trade exist?

External answer — Personal Finance Stack Exchange Author: user100029 Original post: https://money.stackexchange.com/a/127765 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. To answer your first question - the rule changes/evolves overtime. As of recently, it's been loosened for asset class investments such as private equity and venture capital. The primary goal behind the Volcker rule was to separate business activities between the investment side of a bank and the commercial/consumer-facing side so as not to use depositor's cash as collateral against risky investment strategies, primarily referring to complex derivative trading. S&T's main function is to act as a market maker (liquidity provider) for buyers or sellers of financial instruments - it's only supposed to use the funds of their own company's clients (flow trading) who are comfortable with the risks the traders will take with their capital. Any other funds are typically off limits. There are, of course, examples like BofA Merrill Lynch about half a decade ago that used the funds/assets in their client's accounts as collateral (without their permission) to engage in risky options trading strategies, but fines are given out when there's a breach of any sort like this typically. Here is an SEC filing regarding this example: https://www.sec.gov/news/pressrelease/2016-128.html To answer your second question, that has to do with prime brokerage accounts. Not all participants on an exchange trade/invest in discount brokerage accounts like what is traditionally offered by companies such as TD Ameritrade, Vanguard, Charles Schwab, E-Trade, etc. In fact, the individuals/companies trading/investing the largest amounts of capital on an exchange are often required to use a prime brokerage account. This is a special type of brokerage account that investment banks offer where a broker can buy and sell large volumes of asset classes for the investor(s)/trader(s). To emphasize, Wall Street primarily caters to the top 1% of the population, so when opportunities arise in capital markets, people/companies with large amounts of money are ensured that their trades can be executed without moving markets/alerting others to their presence of buying/selling, which could cause them to lose out on the once existent opportunity. Another reason has to do with SEC regulation - for example, any company/person must disclose/file a document with the SEC if they wish to buy more than 5% of a publicly-traded company's equity. These prime brokers also cater typically to only a few clients since their clientele typically manage large swaths of capital. This is unlike a discount brokerage/broker where they cater primarily to "smaller" amounts of capital (anything less than 25 million USD is considered "small" in financial markets terms relative to all players in the market)