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Proprietary Trading

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What is Proprietary Trading?

Table of Contents

What is Proprietary Trading?

The original definition of proprietary trading is the financial trading – the buying and selling of equities, forex markets, bonds, and other financial securities, done by banks, hedge funds, and other financial institutions on their own book, using their own money rather than on the behalf of their clients, for their own benefit.

Through the ’70s, 80’s and 90’s proprietary traders at the big banks generated huge profits for themselves and their employers. Banks and financial institutions on Wall Street, the city of London, Frankfurt, Chicago, and Hong Kong were the main trading hotspots and used to have floors full of highly paid proprietary traders looking forward to their massive annual bonus.

This drive for profit and the intense trading competition between the big banks and weak regulation lead to the creation of new markets (trading profit possibilities) from collateralized securities of high risk and unsecured products. The high risks of these products were ignored until they eventually collapsed creating the worldwide financial crisis of 2008. 

Today many of the large banks’ trading floors are now empty – that’s not to do with Covid-19, it’s down to the regulations brought in after 2008 which have limited the ability of the banks to risk their own money. The heady days of proprietary bank traders buying Ferrari sports cars with their annual bonus cheque are mostly long over. Proprietary trading has moved on.

What is Prop Trading?

Prop trading is an umbrella term for trading done by traders at companies that just specialize in trading securities for profit – Prop Trading firms. The traders working for these companies will generally specialize in a particular market type – forex, commodities, index markets, bonds, etc. The money traded will come from investors or the trader’s own account.

There are prop trading firms that will sell space at a trading terminal to retail traders who will then trade their own accounts. If these traders are good then they may find that other investors are prepared to allow the trader to trade some of their money for a commission. Buying a seat at one of these prop trading firms may for some retail traders be a good investment in their potential progress. But the costs can be high and there are only a limited number of seats available in a small number of cities, and the turnover of traders is quite high, suggesting a high failure rate.

How different are Bank traders from Prop traders?

Traditionally Bank trading floors ran long training schemes and new entrants would have to work for a successful trader or trading desk for many years before they would ever be let loose on trading real money. An old friend of mine started at one of the UK’s biggest banks in the mid-’80s and sat next to a trader logging every trade for 2 years before even being asked his opinion of a potential market move. Eventually, he went on to run the desk for 10 years before moving away from trading for further promotion and eventually retired as a director of the same bank. 

Another friend is currently head of the London bond trading desk at one of the top 3 US investment banks, his day is no longer spent looking for profit opportunities for the bank. It’s more about the management of the order flow from their clients. The desk is significantly smaller than it used to be and is now a loss leader for the bank. Pretty much all trades on all the desks have to pass compliance before they can get placed, so there is much less instant bank trading reaction to news flow than retail traders believe there to be.

One of my best school friends was one of London’s top Eurobond traders through the ’90s, he exited early, after making quite a few millions, and moved to live near a beach in Europe. He is the only ex-bank trader I know who still trades and makes good money trading his own account at home.

I recently had an electrician come to do some work for me and it turned out he had also been quite a successful trader for one of the banks, but in no way would he now risk his own money to trade. He sold the Ferrari to buy a van and pay for his electrician training.

Some of the top prop traders have come from the downsizing of big bank trading. These clearly are well-trained and possibly good traders. It does not seem however that any of the prop trading firms are running trading training at the same level the banks used to do. And none of them are employing junior traders to sit alongside the main traders to learn for a number of years. Traders are expected to earn their keep quite quickly or they are gone.

What is online (Prop) Proprietary Trading?

Companies involved in online Prop Trading provide funding for retail traders and the companies share the profits from trading forex and or futures whilst covering the losses of the trader. The business model has many variations and it can be difficult for retail trader consumers to assess which is the best for them to work with. 

The consumer retail trader pays to pass a trading test and then might be given a funded trading account. The trading tasks are not easy and most traders will fail, at this point, they may repurchase another opportunity to take the test. As a consumer, it’s important for the trader to look closely at the business model of the online prop trading firm and ask, “does this company really want me as a funded trader?” Certainly, it looks like a number of the companies just want you – the consumer, to keep consuming and multiplying your test fees.

Is Funded Trading Plus any good?

Funded Trading Plus is one of the newest online prop trading firms. The company has been developed by a group of professional traders who have experience of working at traditional prop trading firms teamed up with financial business experts. Their business model is aimed at finding talented traders and unlike any other online prop trading firm, immediately rewarding the talented traders. We expect Funded Trading Plus to quickly establish itself and become one of the best online prop trading firms.

Further Learning and Research

If you’d like to know more about the reality of being a big investment bank trader then we recommend that you read Black Swan by the former options trader, Nassim Nicholas Taleb.

Learn about how much online prop traders can expect to earn.

See how this US trader passes $100,000 online prop firm evaluation is just 2 hours.

Learn more about Funded Trading Plus.

How to start prop trading 

The best online prop funded trading programs in 2022.


Post a comment

3 Responses

  1. From reading the minimum stop rule of 25 ES points would mean at 2:1, a profit of 50 ES points to count towards the 125 trades. So a trader who takes trades with a 10 point stop and 20 point profit will not have these trades counted in the 125 trades to qualify? Surely not?

    This would need a trader to have 75 ES trades with a 50 point profit on each one?

    1. We’ll shortly have a full list of the stop sizes required and we are actively looking at making ES significantly smaller.

    2. We’ll shortly have a full list of the stop sizes required and we are actively looking at making ES significantly smaller.

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