Proprietary trading


Proprietary trading occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money to make a profit for itself.
Proprietary traders may use a variety of strategies such as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, or global macro trading, much like a hedge fund.

Structure and operation

Proprietary trading firms typically allocate capital to traders under defined risk management rules, including position limits, maximum drawdowns, and loss thresholds. Traders are generally compensated through performance-based arrangements, in which profits are shared between the firm and the trader according to contractual terms. Unlike hedge funds, proprietary trading firms usually trade only the firm’s own capital and do not manage external investor funds. As a result, proprietary trading firms focus primarily on internal risk controls and capital efficiency rather than asset gathering or client reporting.

Regulation

Following the 2008 financial crisis, some jurisdictions introduced restrictions on proprietary trading by banks. In the United States, the Volcker Rule limits deposit-taking institutions from engaging in certain types of prop trading. Independent proprietary trading firms, which do not take customer deposits, are generally not subject to these prohibitions.

Business models

Proprietary trading can be carried out under several organizational and operational models, including independent trading firms and regulated banks, with differences largely driven by regulation, market access, and risk controls.

Notable proprietary trading firms