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 reasons including 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 to tens of billions depending on the size of the institution.

BREAKING DOWN '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 creating a simple way to review the institution's previous trading activities of the 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 are going to be held long-term.

Securities held in a trading book must be eligible for active trading.

Trading books are subject to gains and losses as the prices of the included securities change. Since these securities are held by the financial institution, and not be individual investors, these gains and losses impact the financial health of the institution directly.

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 rogue traders.

Impact of Trading Book Losses

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)/Russian debt crisis of 1998, and the Lehman Brothers bankruptcy in 2008. 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.

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.

RELATED TERMS
  1. Public Book (Of Orders)

    A book containing all of the buy and sell orders for a specific ...
  2. Order Book

    An electronic list of buy and sell orders for a specific security ...
  3. Book

    A record of all the positions that a trader is holding. This ...
  4. Buy The Book

    An order to purchase all shares available in the market for a ...
  5. Price to Tangible Book Value - ...

    A valuation ratio expressing the price of a security compared ...
  6. Book Value

    1. The value at which an asset is carried on a balance sheet. ...
Related Articles
  1. Investing

    Book Value: How Reliable Is It For Investors?

    In theory, a low P/B ratio means you have a cushion against poor performance. In practice, it is much less certain.
  2. Investing

    The Difference Between Book and Market Value

    Book value is the price paid for an asset. It never changes as long as the asset is owned. Market value is the current price at which the asset can sell.
  3. Investing

    Market Value Versus Book Value

    Understanding the difference between book value and market value is a simple yet fundamentally critical component to analyze a company for investment.
  4. Investing

    What's Recorded in a Cash Book?

    A cash book is an accounting book that records all cash receipts and cash payments before they’re recorded in a business’s general ledger.
  5. Investing

    Investing Books It Pays To Read

    We provide some classic and lesser-known titles to add to your collection.
  6. Personal Finance

    Just the Right Book Review: Is It Worth It?

    Take an in-depth look at Just the Right Book, a subscription service that delivers personalized book selections based on your reading history and preferences.
  7. Investing

    Book Value Per Share for Banks: Is It a Good Measure? (WFC, BAC)

    Find out why bank stocks usually trade below book value per share, and understand how trading activities increase banks' risk exposures and affect valuation.
  8. Investing

    Seven Investing Books For Your Summer Reading List

    It’s almost 4th of July, the season of summer reading. Picking up a book during your holiday can be a great opportunity to learn more investing.
  9. Investing

    Using The Price-To-Book Ratio To Evaluate Companies

    The P/B ratio can be an easy way to determine a company's value, but it isn't magic!
  10. Investing

    6 Books for Rental Property Investors

    We'll look at six books that can help make you a better rental property investor.
RELATED FAQS
  1. What's the difference between book and market value?

    Book value is the price paid for a particular asset. This price never changes so long as you own the asset. On the other ... Read Answer >>
  2. What is the difference between book value and carrying value

    Dig deeper into the definitions of carrying value and book value, and learn to differentiate between their various financial ... Read Answer >>
  3. What is the difference between book value and market value

    Learn the differences between book value and market value, and see how investors use each type to determine if a company ... Read Answer >>
  4. What is the difference between a company's book value per share and its intrinsic ...

    Book value and intrinsic value are two ways to measure the value of a company.In simple terms, book value is based on the ... Read Answer >>
  5. What is the difference between Book Value Of Equity Per Share (BVPS) and book value ...

    Understand the differences and similarities between book value of equity per share, book value over equity and the price ... Read Answer >>
  6. Who uses book value to estimate the value of a company?

    Understand the meaning of the term "book value" and how it is used by market analysts to estimate the worth or market value ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center