Proprietary trading

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Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using customer funds) to make a profit for itself. [1]

Contents

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. [2]

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. [3] 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. [4] Independent proprietary trading firms, which do not take customer deposits, are generally not subject to these prohibitions. [5]

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. [6] Retail proprietary trading firms evaluate traders using demo or live accounts before allocating capital. Successful traders are compensated through a profit-sharing arrangement. [7] [8]

By the mid-2020s, the demographic profile of proprietary traders shifted significantly toward younger generations. The accessibility of remote funding programs and the gamification of trading challenges have driven a surge in participation among Gen Z and Millennials. [9]

Notable proprietary trading firms

See also

References

  1. ↑ Heather Stewart (21 January 2010). "What is 'proprietary trading'?". The Guardian .
  2. ↑ "Proprietary Trading: What It Is & Related Trading Firms". DayTradeTheWorld. 28 September 2020.
  3. ↑ "Prop Trading vs Hedge Funds: What Every Investor Should Know" . Retrieved 10 January 2026.
  4. ↑ "Volcker Rule: Definition, Purpose, How It Works, and Criticism". Investopedia. Retrieved 10 January 2026.
  5. ↑ "Factbox: What is the U.S. Volcker Rule?". SEC (U.S. Securities and Exchange Commission). December 10, 2013.
  6. ↑ Prudential Regulation Authority (2020). Proprietary Trading Review (PDF) (Report). Bank of England. Retrieved 2026-01-21.
  7. ↑ "What Is Prop Trading?". InvestingLive. 31 December 2025.
  8. ↑ "Proprietary Trading Guide". Axi. Retrieved 5 February 2026.
  9. ↑ "What is prop trading? How to pass the challenge: Gen Z and Millennial traders". Business Insider. December 2025. Retrieved 5 February 2026.
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