[mruts]

The rule they are talking about is the Volcker Rule. Prevents certain banks from proprietary trading. They are only allowed to buy and sell for the purpose of market making.

This, of course, is an incredibly stupid rule. There’s not really a big difference between market making and proprietary trading in the first place.

[kweinber]

Proprietary trading is trading your own money with no obligation to transact or do any business with others.

Market making is offering public liquidity as part of a market function. They are designated market participants with rules and responsibilities.

They are not the same.

[mruts]

There's not a market maker in America that's selling and buying in order to provide liquidity.

You buy low, and sell high, that's the end of the story, for both proprietary trading, trading for clients, and market making. There's no fundamental, categorical difference between these functions.

The difference between prop trading and market making is fundamentally about the time horizon of exposure. Market makers are aiming to zero out their exposure through frequent trading, while prop trading attempts to express a view on the market in the long-term (seconds for market making vs minutes/day/years for prop trading).

I'm a professional quant, and I don't see much of difference, at least as far as the government is concerned.

[bboreham]

I think you might be a bit focused on the equity market there. In fx and interest rates markets there is no “public liquidity”, everything is bilateral.

[TuringNYC]

They are not the same, but Market Making requires hedging. Hedging is not usually 1:1 but rather portfolio hedging — so distinguishing prop trading from hedging is difficult except in the obvious case of prop desks where there was not hedging mandate.

Consider the London Whale incident — the entire $6b shortfall was a giant prop position passed off as a hedge.