What is proprietary trading?

 What is proprietary trading?

Proprietary, private, prop trading (proprietary or prop trading) is precisely the case where a financial company prefers to generate profits directly from market activity rather than from commissions with minimal margin derived from client trading. Such a company is focused on proprietary trading, where it takes all profits from trades, not just commissions.

 

A proprietary trading company, unlike a fund (a hedge fund or an investment company) operates with its own capital or the capital of a relatively small number of participants and not to invest in a limited number of securities or other financial instruments with subsequent payment of interests/dividends to its investors but uses its own (or attracted) capital to give it to the most successful traders of the company for management, serving for them on the one hand as an investor and increasing their profit. 

At the same time the degree of freedom of the trader who receives the company's money for asset management is quite high. The main requirement to the trader is to be a profitable, earning trader and to follow the rules of risk management, individual and prescribed by the company.

For the opportunities provided (mainly they concern capital and technical means, like analytical platforms and trading terminals) the trader shares a predetermined portion of the profit with the proprietary company.

The classic proprietary trading business is when the trader trades entirely with the company's funds and gives the company a percentage of his earnings. This percentage can be a public offer or an individual agreement with the company. There are also other, mixed forms of proprietary trading. In particular it is when the trader trades on the company's capital, but financial risks from trading operations remain on him, i.e. when trading on the exchange, he has access to much more capital, than he has, but all losses are covered by his own deposit, which is kept on the company's account. In this form of business a proprietary trading company often acts as a broker - it sets the amount of commission, provides technical support and gives some leverage, which puts this type of trading in the category of margin trading, i.e. trading with leverage. In addition to commission there may be other fees (for example, membership fee) or percentage of trader's profit. In this case the company receives the trader's capital in the amount of his deposit for granting a leverage to other participants.