Close this search box.

Table of Contents

Proprietary Trading


Proprietary trading refers to a financial firm or bank that invests for direct market gain rather than earning commission dollars by trading on behalf of clients. Essentially, the firm makes profit through these trades, its primary source of revenue, instead of through service fees. This type of trading can involve a variety of strategies including equity trading, arbitrage, and market making.


The phonetics of the keyword “Proprietary Trading” is /prəˌprʌɪəˈtɛriː ˈtreɪdɪŋ/.

Key Takeaways

  1. Proprietary Trading Definition: Proprietary trading, also known as prop trading, involves a financial firm or commercial bank investing for direct market gain instead of earning commission dollars by trading on behalf of clients. This kind of trading activity is conducted using the company’s own money to generate profits for itself.
  2. Risk Factor: Proprietary trading can be risky as it involves speculative investments. The firm involved in proprietary trading could stand to lose a significant amount, or all, of the money it has invested. To mitigate these risks, most firms establish detailed risk management and compliance mechanisms.
  3. Regulation Impact: Regulations such as the Volcker Rule in the U.S have imposed restrictions on proprietary trading by commercial banks, introduced to prevent high-risk trading activities from endangering the financial system and customer deposits. These regulations can greatly affect the proprietary trading landscape.


Proprietary Trading, often referred to as “prop trading,” is important in the world of business and finance because it affords banks, financial firms, or institutions the opportunity to generate direct profits from the markets. It involves trading stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm’s own money to make a profit for itself, rather than earning commission by trading on behalf of its clients. It also enables these firms to manage and control risk, create market liquidity, and potentially generate significant returns. This practice, however, can also bring substantial risk, which is why it is highly regulated and scrutinized.


Proprietary trading, also known as prop trading, refers to a trading strategy where a financial firm or commercial bank invests for its own direct gain instead of earning commission dollars by trading on behalf of its clients. The purpose of proprietary trading is to earn higher profits for the firm. These trades are typically speculative, betting on the direction of the market to capitalize on predicted movements in market prices. The intention here is not to facilitate trades for clients, but to create a profit for the institution itself.It is important to understand that proprietary trading is more risky than the conventional executing of trade orders on behalf of clients. Given the potential for high profits, the risks involved are also substantial. These strategies could include positions in stocks, bonds, commodities, currencies, derivatives or any financial instruments. The key concept is that the company isn’t making these trades to help clients. Rather, they are making these trades to benefit their own bottom line. The trade is solely the result of the company’s own calculations and speculation.


1. Goldman Sachs and Merrill Lynch: Both investment banking firms are known for their proprietary trading desks. Their traders engage in proprietary trading by using the company’s own funds to make investments in a variety of financial instruments. They make trades on behalf of the company rather than the clients, aiming to generate significant profits.2. Tower Research Capital LLC: This is a proprietary trading firm that specializes in quantitative trading and investment strategies. Their proprietary trading activities involve the use of complex algorithms and sophisticated mathematical models to identify trading opportunities.3. DE Shaw & Co.: This is one of the largest and most successful hedge funds in the world that strongly involves proprietary trading. They are also known for their algorithmic trading strategies, where trades are executed by a computer system based on pre-set market patterns and trends. Their proprietary trading strategies have resulted in high returns for the firm.

Frequently Asked Questions(FAQ)

What is Proprietary Trading?

Proprietary Trading, also known as prop trading, occurs when a financial firm trades stocks, bonds, commodities, their derivatives, or other financial instruments, using its funds instead of using customers’ money. This allows a higher profit for the firm, but it also bears all the potential losses.

What type of firms usually conduct Proprietary Trading?

Many different types of financial firms, including investment banks and hedge funds, engage in proprietary trading. Some firms are built around this business model, earning most of their income from trading activities.

What are the risks associated with Proprietary Trading?

The main risk in proprietary trading is the potential for loss. If a trader or trading algorithm makes poor decisions, the firm can suffer substantial financial loss. This risk can be particularly high in volatile or uncertain markets.

How is Proprietary Trading different from client trading?

Proprietary Trading involves a financial firm making trades with its own money, while client trading refers to the practice of trading on behalf of a client and using the client’s money.

How is Proprietary Trading regulated?

Proprietary Trading is heavily regulated, particularly following the financial crisis of 2008. Legislation such as the Volcker Rule under the Dodd-Frank Act in the United States restricts banks from making certain types of speculative investments using their own accounts.

Do Proprietary Traders need to have specific qualifications?

Yes, Proprietary Traders usually need to have a deep understanding of financial markets and instruments. Formal qualifications in finance or economics are usually beneficial, along with strong analytical skills.

Is Proprietary Trading ethical?

Whether proprietary trading is ethical is a topic of debate. Some people argue that it’s a form of gambling that can lead to significant financial instability. Others maintain that it’s a valid business strategy that can drive market efficiency and profit.

Related Finance Terms

Sources for More Information

About Due

Due makes it easier to retire on your terms. We give you a realistic view on exactly where you’re at financially so when you retire you know how much money you’ll get each month. Get started today.

Due Fact-Checking Standards and Processes

To ensure we’re putting out the highest content standards, we sought out the help of certified financial experts and accredited individuals to verify our advice. We also rely on them for the most up to date information and data to make sure our in-depth research has the facts right, for today… Not yesterday. Our financial expert review board allows our readers to not only trust the information they are reading but to act on it as well. Most of our authors are CFP (Certified Financial Planners) or CRPC (Chartered Retirement Planning Counselor) certified and all have college degrees. Learn more about annuities, retirement advice and take the correct steps towards financial freedom and knowing exactly where you stand today. Learn everything about our top-notch financial expert reviews below… Learn More