Trading

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What is trading on financial markets?

Trading refers to the activity of buying and selling financial instruments (such as equities, bonds, currencies, commodities, derivatives, or structured products) on financial markets.
Within a Corporate and Investment Bank, trading is a regulated, structured, and supervised activity that aims to execute transactions, provide liquidity and manage associated market risks.

What is the purpose of trading?

Trading serves several essential functions for clients, banks, and the broader economy:

  • facilitating transactions: companies, investors, insurers, funds, and governments may need to buy or sell financial assets. Traders enable these operations by quoting prices and ensuring smooth execution;
  • contributing to market liquidity: a liquid market allows assets to be bought or sold quickly without significantly affecting their price. By continuously offering bid and ask prices, traders help match supply and demand and support price discovery;
  • managing financial risks: companies exposed to fluctuations in exchange rates, interest rates, or commodity prices can use financial instruments to hedge their risks. Traders design or execute solutions to reduce this uncertainty.

How does trading work?

In practice, trading usually takes place on a trading floor. 
Traders analyze market conditions, quote prices, execute transactions, and monitor the risks associated with their positions. When necessary, they implement hedging strategies to limit the bank’s exposure.
However, this activity involves significant risks, including market risk, liquidity risk, counterparty risk, operational risk, model risk, and compliance risk. This is why trading is strictly supervised through control frameworks, risk limits, capital requirements, and robust regulation.

It is important to distinguish between two types of activity:

  • Client-driven trading is the activity through which a bank serves its clients’ needs: executing orders, hedging risks, structuring products, or providing liquidity. Today, it represents the core of trading in regulated banking institutions.
  • Proprietary trading refers to a bank taking positions in the markets for its own account, with the aim of generating profits independently of client demand. Since the 2008 financial crisis, this activity has been significantly restricted, regulated, or separated depending on jurisdictions, particularly in Europe and the United States.

Proprietary trading activities are forbidden within Societe Generale unless such activities are undertaken in connection with an exception or exclusion to the Volcker Rule and the French Banking Law. Additionally, the French Banking Law prohibits Proprietary trading on financial instruments (derivatives) whose underlying is an agricultural commodity.