# 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.

Source: https://learn.tradelabsai.com/industry/proprietary-trading/  
Track: The Trading Industry · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Proprietary Trading", https://learn.tradelabsai.com/industry/proprietary-trading/

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](https://learn.tradelabsai.com/strategies/market-making/) |
| Quantitative prop firms | Systematic strategies across markets | Statistical arbitrage, futures strategies. See [Statistical Arbitrage](https://learn.tradelabsai.com/strategies/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](https://learn.tradelabsai.com/industry/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](https://learn.tradelabsai.com/history/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](https://learn.tradelabsai.com/strategies/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](https://learn.tradelabsai.com/algo-trading/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 |

**Example: The economics of an evaluation**
A program charges $150 a month for an evaluation with a $3,000 profit target and a $2,000 trailing drawdown limit. A trader who fails three times and passes on the fourth attempt has paid $600 before any payout. If they then earn $2,000 in the funded account with a 90% profit split, they receive $1,800, a net gain of $1,200, but many traders never reach a payout. Because most participants fail, fees can be the main source of revenue for some programs. Read the rules on drawdowns, payouts and account resets carefully. See [Risk of Ruin](https://learn.tradelabsai.com/risk/risk-of-ruin/).

## Questions to ask about any prop firm

1. **Whose capital is at risk:** real firm money or a simulated account?
2. **How does the firm make most of its money:** trading profits or fees?
3. **What are the exact rules** for drawdowns, consistency and payouts?
4. **Is the firm or its broker regulated?** See [Trading Regulators: SEC, CFTC, FINRA and NFA](https://learn.tradelabsai.com/industry/trading-regulators/).
5. **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](https://learn.tradelabsai.com/industry/quant-trader/) and [Market Maker and Options Trader](https://learn.tradelabsai.com/industry/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](https://learn.tradelabsai.com/industry/hedge-funds/).

## Continue learning

- Next lesson: [Hedge Funds](https://learn.tradelabsai.com/industry/hedge-funds/)
- Previous lesson: [Thinkorswim](https://learn.tradelabsai.com/industry/thinkorswim/)
- Related: [Thinkorswim](https://learn.tradelabsai.com/industry/thinkorswim/): Thinkorswim is Charles Schwab's trading platform, known for options analysis, charting, paperMoney and thinkScript. Learn its features and who it suits.
- Related: [Prop Trader](https://learn.tradelabsai.com/industry/prop-trader/): What a prop trader does, how professional prop firms hire and train, how retail funded accounts work, typical rules and how to judge if it suits you.
- Related: [Hedge Funds](https://learn.tradelabsai.com/industry/hedge-funds/): Hedge funds are private investment pools using flexible strategies, leverage and short selling. Learn the main strategies, fee structures, regulation and risks.
- Related: [Market Making](https://learn.tradelabsai.com/strategies/market-making/): Market making quotes both a buy and a sell price to earn the bid ask spread. Learn how market makers manage inventory, adverse selection and risk.
- Related: [High-Frequency Trading](https://learn.tradelabsai.com/algo-trading/high-frequency-trading/): High frequency trading uses extreme speed to trade huge volumes for tiny profits per trade. Learn the main HFT strategies, the technology and the criticisms.
- Related: [Trading Careers Explained](https://learn.tradelabsai.com/industry/trading-careers-explained/): A map of trading careers: traders, quants, developers, portfolio managers, risk and operations. Learn what each role does and the skills it needs.