What is Proprietary Trading?

Definition: Proprietary trading is when a firm invests it’s own money with the aim of a direct own profit instead of making commissions from clients’ trades.

What Does Proprietary Trading Mean?

What is the definition of proprietary trading? Prop trading takes place when an investment bank or a brokerage firm trades assets for the firm’s own profit, instead of trading assets for a commission from its clients.

Prop trading does not involve a client; hence proprietary trades are, usually, separated from the bank’s trading floor, accounting for a small percentage of the bank’s total revenues. In general, firms and banks that employ prop trading may have a competitive advantage in terms of returns, but this is not always the case.

Let’s look at an example.


Company A is a proptrading firm headquartered in New York, NY. The firm specializes in the equity index, derivatives trading (futures and options), and commodity trading. In addition, it acts as a market maker, assuming the risk of holding certain securities to facilitate their trading.

The company has a user-friendly platform where it offers market-making guidance as well as tools and insights about trading in the most efficient way. The platform uses high-speed data transfer technology and offers sophisticated financial services that support prop trading.

The firm’s traders are adjusting their trade to assume the increasing trading costs, thereby lowering the costs for the firm. Through the use of sophisticated trading strategies, they seek to optimize the trading performance of the traded securities, while leveraging risk.

At the same time, they are focusing on certain core markets, seeking to act as market makers in a smaller group of securities, thereby reducing the time spent on trading and realizing a higher profit for the firm.

Finally, they monitor market activity, seeking to capitalize on the opportunities of liquid markets through the use of the most liquid investment vehicles, which, in effect, prompt them to limit the trading costs.

Summary Definition

Define Proprietary Trading: Prop trading means an investment company invests its own funds to generate profits for itself.