Trading Book

AAA

DEFINITION of 'Trading Book'

The portfolio of financial instruments held by a brokerage or bank. Financial instruments in a trading book are purchased or sold to facilitate trading for the institution's customers, to profit from trading spreads between the bid and ask prices, or to hedge against various types of risk. Trading books can range in size from hundreds of thousands of dollars at the smallest institutions to tens of billions at the largest financial institutions. Most institutions employ sophisticated risk metrics to manage and mitigate risk in their trading books.

INVESTOPEDIA EXPLAINS 'Trading Book'

The trading book has been the source of massive losses for a number of financial institutions in recent years. Such losses often arise because of extremely high degrees of leverage employed by an institution to build the trading book. Another source of trading book losses is disproportionate, highly concentrated wagers on specific securities or market sectors by errant or 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 LTCM/Russian debt crisis of 1998, and the Lehman Brothers bankruptcy in 2008. In fact, the global credit crunch and financial crisis of 2008 was significantly attributable to the hundreds of billions of losses sustained by global investment banks in the mortgage-backed securities portfolios held within their trading books.

RELATED TERMS
  1. Lehman Brothers

    A firm that was once considered one of the major players in the ...
  2. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  3. Risk

    The chance that an investment's actual return will be different ...
  4. Security

    A financial instrument that represents: an ownership position ...
  5. Long-Term Capital Management - ...

    A large hedge fund led by Nobel Prize-winning economists and ...
  6. Hedge

    Making an investment to reduce the risk of adverse price movements ...
Related Articles
  1. An Overview Of Commodities Trading
    Options & Futures

    An Overview Of Commodities Trading

  2. How To Break Up With Your Bank
    Options & Futures

    How To Break Up With Your Bank

  3. Taking a Trip to Trader Town: Exploring ...
    Active Trading

    Taking a Trip to Trader Town: Exploring ...

  4. Tips For Keeping Your Financial Data ...
    Personal Finance

    Tips For Keeping Your Financial Data ...

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center