Proprietary Trading
Proprietary trading means a firm trades its own capital for profit. Learn how prop firms work, the Volcker Rule, retail funded trader programs and their risks.
Proprietary trading, or prop trading, is when a firm trades with its own money rather than client money, keeping the profits and bearing the losses. It ranges from global market making and high frequency firms to small trading arcades where individual traders share a firm's capital. In recent years the term has also been used for retail "funded trader" programs, which charge fees for evaluations that promise access to firm capital. These are very different businesses under the same name, and understanding the difference matters for anyone considering a prop trading career.
Types of proprietary trading#
| Type | How it works | Examples of activity |
|---|---|---|
| Electronic market making and HFT firms | Trade their own capital with automated strategies, mostly providing liquidity | Quoting stocks, options, futures, ETFs. See Market Making |
| Quantitative prop firms | Systematic strategies across markets | Statistical arbitrage, futures strategies. See Statistical Arbitrage |
| Discretionary prop firms | Traders use firm capital with risk limits and profit splits | Futures, equities, options |
| Bank prop desks (historical) | Banks traded their own money for profit | Largely ended in the US by the Volcker Rule |
| Retail funded trader programs | Traders pay for evaluations; those who pass trade simulated or firm accounts for a profit share | Mostly futures and forex. See Prop Trader |
The Volcker Rule#
After the 2008 crisis, the Dodd Frank Act included the Volcker Rule, named after former Federal Reserve chair Paul Volcker. It generally prohibits US banks from short term proprietary trading for their own profit, while allowing market making, hedging and certain other activities. Banks closed or spun off many prop desks, and much of that talent moved to hedge funds and independent prop firms. See The 2008 Financial Crisis.
How professional prop firms make money#
- Market making: earning the bid ask spread and exchange rebates across huge volumes.
- Arbitrage: exploiting small price differences between related instruments. See Arbitrage Strategies.
- Systematic strategies with many small edges.
- Discretionary trading by experienced traders within strict risk limits.
These firms invest heavily in technology, data and research, and most of their profit comes from scale and speed rather than a few big bets. See High-Frequency Trading.
Retail funded trader programs#
| Feature | Typical arrangement |
|---|---|
| Entry | Pay a fee for an evaluation account |
| Rules | Hit a profit target without breaching daily loss and trailing drawdown limits |
| After passing | Trade a funded account, often simulated, with a profit split |
| Firm revenue | Largely evaluation fees, resets and subscriptions |
Questions to ask about any prop firm#
- Whose capital is at risk: real firm money or a simulated account?
- How does the firm make most of its money: trading profits or fees?
- What are the exact rules for drawdowns, consistency and payouts?
- Is the firm or its broker regulated? See Trading Regulators: SEC, CFTC, FINRA and NFA.
- What do independent reviews and payout records show?
Careers at professional prop firms#
Professional prop firms hire traders, quantitative researchers and engineers, typically recruiting graduates with strong maths, programming and problem solving skills. Training programs teach market making and risk management, and pay is often tied to performance. See Quant Trader and Quant Researcher and Market Maker and Options Trader.
Frequently asked questions#
What is proprietary trading?#
Trading a firm's own capital for its own profit, rather than trading on behalf of clients.
Can banks still do proprietary trading?#
In the US, the Volcker Rule generally prohibits banks from short term proprietary trading, though market making and hedging are allowed.
Are funded trader programs real prop firms?#
Some offer genuine profit sharing, but many earn mostly from evaluation fees and use simulated accounts; they differ greatly from professional prop trading firms.
Next, learn how hedge funds work in Hedge Funds.
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Mentioned in
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