Within the liability section of our example bank, we've got a line called trading liabilities, which is one of the more significant liabilities on this bank's balance sheet.

It's a big number, $203 billion.

This represents the liability side of this bank's market making business.

We're going to take a look in a bit more detail of what's in this item and the mechanics of how it works.

This is the market making liability, but there's also an asset related to market making as well.

If we take a look at the detail, you can see that we've got a breakdown here in the notes.

And on one side, we've got the assets involved in market making and also there's a fair slug of derivatives there as well.

47 billion of the assets and 75 of the liabilities.

But we're actually interested in the trading cash instrument liabilities.

These are effectively short sold securities, and you can see that we're focused in specific areas.

So we've got a fair amount here of government bonds and government agency bonds.

We've also got some corporate loans and debt securities, and also a reasonable amount of equities as well.

This all relates to the market making activities of this investment bank.

If we take a look at the impact on the income statement, you can see that this is a pretty significant business and it's spread into different buckets.

From the footnotes, we can see that it's spread between credit currencies, equities, and commodities.

For the 2024 year, the market making activities made 18.4 billion of profit.

So that's a significant amount of money, but be slightly careful here because a lot of this activity is not necessarily done just on its own in isolation.

It's often connected with other transactions or hedging activities.

So it's quite difficult to look at this item on its own.

It's worth having a look at the mechanics of short selling, and what we've done here is to simplify things significantly, just to give you an idea of what exactly is going on here.

So let's take a situation where a trader borrows and then immediately sells a security for $100, and then happily, the security is going to fall to $90 before settlement.

Now we're not going to look at the mechanics and the accounting of the borrowing of the security, we're going to look at the sale and the effect of the fallen price.

So assume that the borrowing has already taken place.

And then what happens is we agree a sale of the security, and we'll record a receivable because we expect to get 100 from the person we sold it to.

And then we create a liability, which is the trading liability because we actually don't have the security to sell because we don't own it.

And that would be a liability of 100.

Then because the price has dropped on the security, it means that actually we're not gonna have to spend 100 to go out and buy the security. We're only gonna Have to 90.

So what we'll do is we'll mark to market the liability of the sold, but not yet purchased down from 100 to 90.

And at the same time, we'll book a profit of 10, and that profit will go through to the income statement as a market making profit and hit retained earnings, which you can see here on the liability and equity side of the balance sheet.