How Prop Trading Works

In practice, prop trading usually refers to smaller, independent firms that focus on market-making. This occurs when a client wants to trade a large amount of a single security or trade a highly illiquid security. As there may not be many buyers or sellers for this type of trade, a prop trading desk will act as the buyer or seller, initiating the other side of the client’s trade.

For example, if an institutional investor wants to sell 200,000 shares of a stock at $10.00 each but is struggling to find buyers at that price, a market-maker might offer to buy the entire block at $10.00 per share, regardless of whether they have a seller. They would then aim to sell the entire volume for more than the original $10.00 per share price to profit from the overall trade.