Proprietary trading

Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, 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 as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, or global macro trading, much like a hedge 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 the 2008 financial crisis, some jurisdictions introduced restrictions on proprietary trading by banks. In the United States, the Volcker 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]

Other commercial models in the proprietary trading industry are the affiliate sites, whose main model relies on the referral of traders to prop firms in exchange for a commission on challenge purchases. The evolution of this is Propinder ^[9] that builds on this by adding a profiling engine ^[10] that connects traders to the most suitable challenges based on their trading style and preferences

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 among Gen Z and Millennials.^[11]

• Flow trading

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