What is Proprietary Trading (“Prop Trading”)?
Proprietary Trading Definition: In proprietary trading, traders buy and sell securities using the firm’s own money to make a profit; the trading may be directional (betting that a security’s price will go up or down) or market-making (acting as both the buyer and seller of securities and making a profit on the bid-offer spread).
Prop trading exists at hedge funds, asset management firms, commodities companies like Vitol and Glencore, and small/independent trading firms – and it used to exist at large banks before the 2008 financial crisis.
In practice, “prop trading” usually refers to the smaller, independent firms that focus on market-making.
For example, if an institutional investor wants to sell 200,000 shares of a stock at $10.00 per share but can’t find any buyers at that price, a market-maker might offer to buy the entire block at $10.00 per share – even if they don’t yet have a seller lined up.
Then, they would aim to sell the entire volume for more than $10.00 per share to profit from the trade.
For more examples, see the articles on fixed income trading and equity trading.