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How Bank Reform Will Affect Proprietary Trading

Banking executives are up in arms over new language in the financial regulation bill that could mean major changes to the core of their banking operations.

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The language in question revolves around changes made to the Volcker rule that Wall Street officials fear could compromise how large firms hedge positions they take on their customers behalf.

Large banks are concerned because it may cut into their market-making profits, which are at the core of what they do in trading stocks and bonds.

Here are the two sides of the debate: Firms say they need to hedge themselves to be able to make trades to offset the risks they are taking on for clients.

The flip side, skeptics say, is that these Wall Street firms are taking advantage of any kind of loophole, so they will still do the proprietary trading and be just as profitable.

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A key issue is that proprietary trading (or prop trading) is very difficult to define.

Proprietary trading is done by the banks with their own capital and on their own behalf. A market-maker, on the other hand, involves trading on a customers behalf, but may use some bank capital to make that customers trade happen.

There is a very fine line between the two.

The Volcker Rule was designed to mitigate the risk of Wall Street, so the government is not in a situation were they have to bailout financial companies like they did with TARP in 2008, when firms were perceived as taking too many risks.

But if you look at the numbers, the actual percentages of prop trading seems surprisingly low— Citigroup is two- to- three percent, Goldman Sachsis approximately 7 percent.

"The Strategy Session," hosted by David Faber, Gary Kaminsky, Kate Kelly and Herb Greenberg airs weekdays at Noon ET on CNBC.