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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]
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.
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.[4] Independent proprietary trading firms, which do not take customer deposits, are generally not subject to these prohibitions.[5]
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 amongGen Z andMillennials.[9]
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