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Proprietary Trading Explained for Beginners

Proprietary trading or prop trading for short is a concept when a company hires and funds a professional to trade Forex, stocks, bonds, crypto, indices, and other assets.


A recruited trader can operate across a variety of financial markets searching for the best winning opportunity. The main mission of a proprietary trader is to make as much profit as possible, as he or she will share it with the company.

Additionally, a proprietary trading firm can provide additional services. They include training, professional coaching, and other support to help their representatives and let them sharpen their investment approaches.

In this article, we will have a closer look at how proprietary trading works and what benefits and downsides it may have.

What Is Proprietary Trading and How Does It Work?

The main reason companies (banks or other financial institutions) use prop trading is to make excess profits. As a rule, these institutions have a bigger capital and more advanced trading software to generate trading signals or ensure sophisticated modeling.

This fact provides plenty of opportunities for proprietary traders. They can apply different strategies including such exclusive methodologies as arbitrage, global macro-trading, index or volatility arbitrage, and many other techniques to maximize their potential profits.

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On the one hand, proprietary trading is considered one of the riskiest investment models. On the other hand, it appears to be one of the most profitable operations for either commercial or investment banks. Individual traders cannot be involved in prop trading, as the concept does not consider executing trades on the clients’ behalf.

Proprietary Trading Advantages

Huge profits are the main advantage of prop trading. While brokers mainly enjoy commissions and different reward types, a proprietary trader shares 100% of income with the firm. Additionally, proprietary traders also have expanded investment opportunities.

Pros for Companies

It lets banks and financial institutions enjoy the maximum possible revenue. What’s more, they may not even recruit traders and act on their own to make profits even higher.

Flexibility in using assets is another great advantage of proprietary trading. In simpler words, banks can buy securities for speculative purposes and later start selling them to their customers, stocking a security inventory for the future. Assets can be provided as loans for those who want to sell short.

As a result, companies have a chance to become the major market driving force, especially when dealing with specific or exclusive types of assets. The firm can use its capacity to provide clients with extra liquidity in some of those securities.

Pros for Traders

As for proprietary traders, they have full access to an advanced technological stack and expanded capital. It helps them apply literally any strategy including automated approaches to execute thousands of trades simultaneously.

Having sophisticated trading platforms at their disposal, prop traders can operate across a variety of financial markets and automate the process of making the most of high-frequency trading. Proprietary traders have all the necessary tools to develop, test, run, and improve their strategies

Proprietary Trading FAQ

Q: Is proprietary trading a good strategy to consider?

A: On the one hand, proprietary trading provides more winning opportunities. On the other hand, the strategy is among the riskiest approaches. Besides, it is not available for individual traders or brokers that operate on their client’s behalf. However, if you are a bank or firm representative, you might want to use prop trading as the major source of excess profit.

Q: What is the most popular proprietary trading firm?

A: You may come across numerous proprietary trading firms that had success. The list of top 5 companies includes Topstep Futures, Fidelcrest, the Funded Trader, Lux Trading Firm, and Surge Trader. Each of these prop firms targets different securities.

Q: How much can a proprietary trader make?

A: The profit depends on a chosen strategy and available technological stack. Additionally, the outcome will depend on the trader’s skills, knowledge, and trading experience. Generally, proprietary traders make from $40,000 to $1 million and more. However, beginner prop traders will make less at the beginning of their careers.

Q: How much can a property trading firm make?

A: As for the proprietary trading firm, its revenues are much higher. The level of profit depends on the agreed percentage. The average level varies from 20% to 50% of every trade.

Q: Is proprietary trading legal?

A: Proprietary trading is legal. The approach can be applied by companies, financial institutions, groups, and brokerage firms. The concept is legal also for individuals but only in case they operate on the firm’s behalf. Just make sure your regional jurisdiction officially allows prop trading.