Research On Self - Business Structure And Financial Derivatives Investment Of Securities Companies

Since the release of "Regulation of Proprietary Trading Business of Securities Trading Agencies" by China Securities Regulatory Commission on October25th,1996, many qualified securities companies have been engaging in proprietary trading. To date, more than a decade has passed. However, the investment return business-wide is still unsatisfactory. The major problem is that the return is excessively volatile so that the overall performance of the securities companies becomes overly exposed. For proprietary trading, the pursuit of high return is often trapped in the pitfall of high risk. This is a simple manifestation of the risk-return trade-off. However, it puzzles the management of many securities firms in China.Following modern portfolio and asset pricing theory, we study the proprietary trading business of securities companies in China focusing on the relationship among the business structure of proprietary trading, risk and return. We perform systematic analysis from different hierarchy and different perspective including:the structural difference between the principal business and the proprietary trading business of securities companies worldwide, the relationship between proprietary trading business and risk-return tradeoff, the application of financial derivatives for risk management and trading strategies. We find that the unbalanced business structure and the monotonicity of investment strategy are the main reasons for excessive volatility of proprietary trading business return.We then explore ways to solve the problems studied. First, we find it effective to restructure the proprietary trading business based on solid scientific theory, optimize asset allocation, and reduce the proportion which is engaged in directional investment, actively hedge market risk with financial derivatives. Second, we can experiment to create a special investment platform focusing on financial derivatives. Making use of various derivative products and abundant derivative trading strategies, we can actively perform market neutral trading such as various hedged strategies and arbitrage strategies. As a result, proprietary trading business return can be smoothed effectively, allowing proprietary trading business to grow in a steady and continuous fashion.