Trading books are essentially the portfolios of large financial institutions. They contain information about all the securities currently held by the institution, as well as the history of any and all accounting transactions involved in the buying and selling of the securities recorded in the book. This makes them a relatively simple resource that can be used to quickly track any of the investment activity made by the institution.
All types of investment activity are included in the trading book. This level of detail is very helpful when considering some type of new transaction that will impact the assets of the bank or financial institution. Should the bank wish to consider establishing a bid/ask spread in conjunction with a possible purchase or sale, reviewing the transaction details recorded in the trading book may prove helpful as part of the process of evaluating the proposed action. In like manner, the information contained in the book may shed some light on the potential risk associated with a given investment scheme.
One of the major functions of any bank or financial institution is to make wise investments that stand a good chance of making a return for their customers. Properly maintained and regularly consulted trading books support this function by providing concise details of past transactions. The detail in the trading book also includes up to the minute information about the assets currently held by the bank and thus helps to establish the foundation for future trading activity.
It is important to note that only assets that are authorized for use in active trading and investment strategies are included in the trading book. Other assets that are not considered authorized for investment activities are accounted for in another portfolio known as a banking book. This means any securities that the bank intends to hold on to until they reach a point of maturity are not accounted for in the trading book. The progress of these long-term investments is recorded in the banking book instead.
The idea of maintaining a separate accounting book for assets that may be used in investing and trading activity is not limited to banks and other types of financial institutions. Private investors also often employ the same approach by creating a special trading book as part of their overall financial record keeping. Just as the book draws a clear line between assets that may be used for trading and those that are intended to be held long term, an investor trading book can accomplish the same goal.