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Proprietary trading (also known asprop trading) occurs when atrader tradesstocks,bonds,currencies,commodities, theirderivatives, or other financial instruments with the firm's own money (instead of using customer funds) to make a profit for itself.[1]
Proprietary traders may use a variety of strategies such asindex arbitrage,statistical arbitrage,merger arbitrage,fundamental analysis,volatility arbitrage, orglobal macro trading, much like ahedge fund.[2]
Since the 2010s, proprietary trading has also become accessible to retail traders through firms that offer so-calledevaluation programs. In this model, individuals can access company capital after passing a test phase under strict risk management rules, such as maximum daily losses, maximum drawdowns, or restrictions on overnight positions. Profits generated are shared between the trader and the firm, while the firm earns revenue through profit splits and fees related to the evaluation process. This model is commonly referred to as a retail prop firm.
Following the2008 financial crisis, some jurisdictions introduced restrictions on proprietary trading by banks. In the United States, theVolcker 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.[3]
TraderNick Leeson took downBarings Bank with unauthorized proprietary positions. UBS traderKweku Adoboli lost $2.3 billion of the bank's money and was convicted for his actions.[4][5]
Armin S, a German private trader, suedBNP Paribas for €152m because they refused to deliver 3000 units ofstructured products which they erroneously sold him for €108.80 each, but actually worth €54,400 each, and did act to reverse the error within the allowed time.[6][7]
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