Last Updated on 7 September, 2021 by Samuelsson

Proprietary trading is one career that attracts both hardcore math enthusiasts and an average Joe on the street. I was a proprietary trader for many years in 2 different companies. How was it, and how does it work? What are the advantages and disadvantages? Below you find out what a prop firm is, how it works, the pros and cons. Prop trading offers great earning potentials, which is completely performance based — one can make millions in bonus for making huge profits but can also get fired for losing money. But what is proprietary trading all about?

I was a proprietary trader for many years in 2 different companies. How was it, and how does it work? What are the advantages and disadvantages? Below you find out what a prop firm is, how it works, the pros and cons. Proprietary trading refers to a kind of trading where a financial firm hires traders to trade on its own money to make a profit rather than offering commission-based services. Assets that are normally traded include stocks, bonds, commodities, currencies, and other financial instruments.

In this post, we will discuss what proprietary trading is, the benefits, how proprietary trading firms work, and examples of popular proprietary trading firms (prop firms).

What is proprietary trading?

Proprietary trading, also known as prop trading, refers to the idea of a financial asset management firm or commercial bank directly trading the market to make profits, rather than earning a commission by trading on behalf of clients or offering other financial services. It is basically when a trading desk at a financial institution, brokerage firm, investment bank, hedge fund, or any other financial firm uses the firm’s capital and balance sheet to directly trade in the market to make profits. Of course, these trades are usually speculative.

In proprietary trading, financial firms try to leverage their in-depth knowledge, excess capital, and competitive advantage in the financial markets to earn an annual return that exceeds index investing, bond yield appreciation, or other investment styles. These firms hire top traders and provide them with the capital, plus in-depth research, to trade securities for them.

Their trades are usually directional betting that a security’s price will go up or down but could also be market-making. Whichever one, the trade various assets, including stocks, bonds, commodities, currencies, any other financial products. These traders make use of different market strategies, including index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, technical analysis, and/or global macro trading.

Of course, these prop firms derive a lot of benefits from proprietary trading; if not, they won’t engage in it. Some of the benefits include:

  • Improved earnings: Proprietary trading provide financial firms with the opportunity to make higher quarterly and annual profits. In addition to the money they make in the form of commissions and fees from client-based trading, these firms try to make money trading their own funds. This way, they improve their quarterly revenue and profits.
  • Stockpiling an inventory of securities: By accumulating speculative inventory, those institutions can offer a great advantage to their clients. Also, they can prepare for down or illiquid moments in the markets when it is more difficult to purchase or sell securities on the open market.
  • Market-making: With proprietary trading, the financial institution can become an influential market maker that provides liquidity on a specific security or group of securities.

What is a prop firm and how do they work?

As you may have realized from our discussion so far, proprietary trading firms are hedge funds, asset management firms, commodities companies, and small/independent trading firms that trade their own funds for profit. Even large banks do have trading desks, but in practice, proprietary trading firms usually refers to the small, independent firms that are made of a group of traders actively trading the market or engaging in market-making.

There are different types of prop trading firms, such as the following:

  • The churn and burn firms: These firms require a trader who wishes to join them to pay thousands of dollars for training and also raise their own trading capital to augment the small capital they provide. The trader gets no base salary but will keep a huge percentage of the profits (well over 50%) made on the firm’s money. This type of prop trading firm is for day traders who want to “go pro”. It’s not good for an average Joe.
  • The more legitimate ones: The firms in this category will provide training for free. However, they do charge the trader a monthly fee to access their data and trade, and the monthly fee may be in thousands of dollars. So, at the beginning of each month, the trader is starting with debt. There is no salary, but the trader gets to keep a huge percentage of the profits.
  • The salary-paying prop trading firms: The firms in this category pay a base salary, offer bonuses, provide training, and build a team that lets the trader grow and develop. They often pick their traders directly from universities but may also poach experienced traders from other firms. Traders get to keep a much smaller percentage of the profits (about 10-30%), but since they are paid salaries and get bonuses from time to time, this category of firms is not as exploitative as the first two. So, we’ll focus on this group.

Examples of proprietary trading firms

There are hundreds of prop trading firms out there that are solely focused on trading their own funds, and many of them trade a variety of derivatives or other complex investment vehicles. Some of the top prop trading firms are as follows:

Belvedere Trading: Belvedere Trading is a proprietary trading firm that is based in Chicago. The firm specializes in trading equity index options. What they do is to take a team and mentor them on how they trade a particular financial product. The firm consistently rotates their traders between products to help them gain more experience, broader knowledge, and more diverse market perspectives. Belvedere Trading deals in US and foreign indices, energies, grains, softs, metals, and interest rates.

BlueFin Trading: Bluefin Trading is a privately-owned multi-strategy trading firm that is focused on seeking out trading and investment opportunities in the global financial markets. The firm is based in New York, London, Chicago, and Hong Kong, and its proprietary trading team uses a multi-strategy approach, including market making in exchange-traded derivative products. Formed in 2001, the firm brings top traders together, and uses innovative and quantitative modeling and cutting edge technology to seek out trading and investment opportunities across equity, commodity, fixed-income, and Forex products.

Bright Trading: Bright Trading, LLC is a professional proprietary stock trading firm that is based in Las Vegas but allows remote trading for its traders. The firm hires hundreds of independent traders who trade from dozens of locations in the United States. In addition, the firm runs the “Bright-At-Home” program that allows traders to enjoy the benefits of proprietary trading from the comfort of their homes.

Akuna Capital: With offices in Chicago, Sydney, Boston, Hong Kong, and Shanghai, Akuna Capital is a fast-growing prop trading house that specializes in derivative market-making and arbitrage. Founded in 2011, Akuna Capital is a young firm with tech and team concept at its core, putting together a team of developers, quants, and traders in the areas of options market-making and quantitative trading. The firm is one of the few non-established firms to provide liquidity in the options market.

3Red Partners: 3Red Partners is a prop trading firm that bridges technology and trading. The firm operates in Amsterdam, London, Chicago, New York, and Singapore. Built around exceptional technology and cutting-edge research, 3Red brings together intelligent, driven, and curious minds from the trading industry to collaborate and solve quantitative finance and technical problems in trading.

First New York: Based in New York and London, First New York is a multi-strategy prop trading firm that was established in 1986. First New York has, for over three decades, identified and partnered with portfolio managers and third-party traders to implement superior strategies in equities, derivatives, fixed income, currencies, commodities, and futures across global markets. The firm provides experienced portfolio managers with infrastructure and capital to deploy their strategies.

DRW Trading Group: DRW Trading Group is a technology-driven proprietary trading firm that operates from Chicago, New York, and London. The firm is an aggressive, dedicated organization that engages in many different aspects of the trading industry, including market-making and proprietary trading, and trades across many asset classes and instruments, using a variety of different models.

Grace Hall Trading: Grace Hall Trading is a proprietary trading firm that specializes in transactional arbitrage, volatility arbitrage, and event-driven trading strategies. The firm is based in Chicago and Charlotte. Established in 2008, Grace Hall Trading utilizes cutting edge technology to efficiently trade futures, equities, and equity options.

Gelber Group: Gelber is a unique service provider for the individual professional trader, a professional trading group, or an institution. Operating from Chicago, Cranford NJ, Greenwich CT, San Diego, London, Switzerland, Gelber Group has an unwavering focus on technology management and service, as seeks to expand access to liquid electronic markets around the world. The firm maintains the philosophy that clear communication and interaction bring successful trading results.

Chicago Trading Company (CTC): A proprietary market-making firm, Chicago Trading Company is recognized internationally as a leading provider of pricing and liquidity on all U.S. derivatives exchanges. Based in Chicago and London, the firm was founded in 1995, and it brings together technologists, quants, operations professionals, and traders. CTC works regularly collaborating to innovate and solve problems in the world’s most sophisticated markets.

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