Exploring Proprietary Trading: Comprehensive Guide

Proprietary trading (prop trading) is when a financial firm trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments, using its own money instead of using clients’ money, to profit from the market.

PROP TRADINGProprietary trading can be an exciting and rewarding career option, but it’s not without its risks.  Let’s examine the advantages and disadvantages of prop trading, as well as some popular strategies employed by firms in this industry.

Why Consider Proprietary Trading?

Proprietary trading firms offer benefits like professional training, buying power, methodology, mentors, and easy start-up for traders. Traders can trade a wide range of assets without risking personal funds. They also have access to experienced traders and small refundable amounts for trading hardware/software that is provided by prop trading firms.

Popular proprietary trading strategies involve providing liquidity, such as pairs trading or trading around the open and close. While proprietary trading offers advantages like leverage and easy entry for undercapitalized traders, it also comes with risks such as potential intellectual property theft and fees for software and other expenses.

Advantages of Prop Trading

There are benefits that come with being a prop trades including  include leverage, diversification, and rebates. Proprietary trading strategies offer traders the opportunity to trade a wide variety of assets without risking personal funds. With leverage being a major advantage for traders with small accounts, prop trading offers easy entry for undercapitalized traders.

Multiple trading platforms are available to traders who wish to pursue proprietary trading strategies. Diversification is another advantage offered by proprietary trading firms as they provide access to different asset classes such as stocks, forex, futures, commodities and derivatives. Rebates are also common in proprietary trading firms which help reduce transaction costs incurred during trades.

Disadvantages of Prop Trading

As a beginner in proprietary trading, you need to understand that while leverage is an advantage for traders with small accounts, it can also be a double-edged sword. With excessive leverage comes increased risk, and losing deposited funds is always a possibility.

Additionally, prop trading firms offer less regulation than retail brokers and may have fees for software and other expenses. It’s also worth noting that proprietary trading strategies are not shared freely among traders and there have been instances of prop firms going bankrupt or engaging in fraud in the past.

  1. Long-Term Capital Management (LTCM): This was a U.S. hedge fund that collapsed in 1998. LTCM claimed to have discovered a scientific method of calculating derivative prices. The firm lost $4.6 billion in the first few months of 1998 and had to be rescued by a private sector consortium.
  2. Bayou Hedge Fund Group: This U.S. hedge fund collapsed in 2005. The founder, Samuel Israel III, defrauded his investors into thinking there were higher returns and used fake audits. The Commodity Futures Trading Commission filed a court complaint and the business was shut down after the directors were caught attempting to send $100 million into overseas bank accounts.
  3. Refco: This was a U.S. broker that went bankrupt in 2005. After becoming a public company in August 2005, it was revealed that Phillip R. Bennett, the company’s CEO and chairman, had concealed $430 million of bad debts. The company entered Chapter 11 and Bennett was sentenced to 16 years in prison.

If you’re willing to put in the work and do proper due diligence before wiring capital to a firm, there are plenty of proprietary trader jobs available with large institutions and successful examples of individuals who have made their fortunes through proprietary trading.

Prop Trading VS Retail and Hedge Funds

Unlike retail trading, where individuals trade their personal funds, prop traders have access to significant amounts of capital provided by their firm. This allows them to execute large trades and take on more substantial market positions, potentially leading to higher returns.

Hedge funds operate as pooled investment vehicles, managing money on behalf of external investors. While both prop trading and hedge funds seek to generate profits through trading strategies, prop trading focuses exclusively on the firm’s own capital, whereas hedge funds are accountable to their investors.

Prop trading often involves high-frequency trading, algorithmic strategies, and sophisticated risk management techniques to exploit short-term market inefficiencies. On the flip side, retail trading tends to be more accessible to individual traders, who may rely on fundamental analysis, technical indicators, or sentiment-based trading strategies.

Prop Trading Strategies

Proprietary trading is a great way for traders to make money, but it requires knowledge of different strategies.

These are 3 out of many that are used:

  1. Statistical Arbitrage: This strategy involves mathematical models to identify small pricing inefficiencies between related securities. Prop traders might use algorithms to execute trades when these inefficiencies are identified. Over time, and with a large number of trades, these small profits can add up.
  2. Pairs Trading: This strategy involves taking a long position in one security and a short position in a related security. The idea is that the securities will move in relation to each other and the trader can profit from the divergence. For example, if two tech companies usually move in tandem, but one falls while the other rises, a trader could short the rising stock and go long on the falling one, expecting them to eventually trend in the same direction.
  3. Momentum Trading: This involves buying securities that are trending up and selling those that are trending down. Traders use technical indicators to identify trends and make trades based on the momentum of the market. This strategy requires careful risk management, as trends can reverse quickly.

It’s important to note that these strategies can be combined for even greater success.

To become a successful proprietary trader, it’s crucial to have a solid understanding of the markets and various indicators, as well as the ability to identify profitable opportunities quickly.

Successful Prop Trading Firms

Successful prop trading firms have established themselves as top players in the financial industry, providing traders with professional training, buying power, and access to experienced mentors.

  1. Jane Street: Jane Street is a global trading firm with a focus on technology. The firm is known for its strong quantitative and analytical approach to trading. They trade a wide variety of assets including equities, bonds, commodities, and digital assets.
  2. Citadel Securities: Citadel Securities is one of the world’s largest market makers, offering a broad array of fixed income and equity products. The firm’s unique capabilities provide liquidity and trade execution services to over 1,000 institutional clients.
  3. Two Sigma Securities: Two Sigma Securities is a leading broker-dealer that combines advanced technology with an “interdisciplinary approach” to trading. The firm is known for its systematic integration of data science and technology to execute trades in the global equities, futures, options, and ETFs markets.

If you’re interested in pursuing a career as a proprietary trader, it’s important to do your research on these firms and others like them. Look into job openings, employee reviews, compensation structures, and any other relevant information to determine which firm would be the best fit for you.

How to Start a Career in Prop Trading

Becoming a proprietary trader typically requires a solid understanding of financial markets, strong analytical skills, and the ability to make quick decisions under pressure. However, there are a few ways you might be able to streamline the process:

  1. Self-Study: There are many resources available online for learning about financial markets and trading strategies. Websites, online courses, webinars, and books can provide a ton of information. This is a flexible and cost-effective way to gain the necessary knowledge compared to traditional education.
  2. Paper Trading: This involves simulated trading to practice your strategies without risking real money. Many online trading platforms offer paper trading accounts. This is a good way to gain practical experience, especially if you’re unable to get an internship or entry-level position in a financial institution.
  3. Trading Competitions: Some universities and organizations hold trading competitions, which is a good way to gain experience and demonstrate your trading skills. Winning or placing in these competitions could catch the attention of proprietary trading firms.
  4. Proprietary Trading Training Programs: Some proprietary trading firms offer training programs for aspiring traders. These programs often involve classroom learning, simulated trading, and mentoring. Some firms might even hire you as a trader if you perform well in their program.
  5. Networking: Building relationships with industry professionals can lead to job opportunities. Consider joining online communities, attending industry events, or reaching out to professionals on LinkedIn.

While these steps might make the process easier, becoming a successful proprietary trader still requires dedication, a strong mental game, and the ability to make decisions under pressure.

Due Diligence for Prop Trading

Before pursuing a career in prop trading, you should conduct due diligence and research on potential firms. Look for firms with a track record of success and positive reviews from current or former traders.

At the time of this article, here are three firms that have openings:

  1. TransMarket Group: They have open positions for a Junior Algorithmic Trader and a Junior Quantitative Trader in Chicago, IL, as well as a Senior Algorithmic Trader.
  2. DV Trading LLC: This firm is hiring for several roles including an Algorithmic Trading Software Developer, a Quant Trader – Interest Rate Futures, and an Options Trader in Chicago, IL. They also have positions open in New York, NY.
  3. All Options: They are looking for a Junior Trader in Austin, TX.

When looking at a firm, consider factors such as payout structures, software and hardware provided, training programs, and regulatory compliance. Familiarize yourself with different proprietary trading strategies such as volatility arbitrage or global macro to determine which aligns best with your skills and interests.

Keep in mind that there are risks involved in prop trading, so it’s important to have a solid understanding of day trading strategies and risk management before getting started. With the right preparation and mindset, becoming a successful proprietary trader can be a rewarding career path with ample job opportunities available in the industry.

Risk Management in Prop Trading

As the saying goes, it’s not about avoiding risks but rather learning to dance with them.

As a proprietary trader, you need to have a clear risk management plan in place before you start trading. This includes setting stop-loss orders and taking profits at predetermined levels. It also involves diversifying your portfolio across different asset classes and markets to reduce overall risk exposure.

One example of a successful proprietary trading strategy that manages risk is Global Macro, which involves analyzing various macroeconomic factors such as interest rates and geopolitical events to make informed investment decisions.

When considering proprietary trader jobs or deciding between prop trading vs hedge fund options, it’s important to assess the level of risk involved and ensure that you have the necessary skills and experience to manage it effectively. Remember, while leverage can be an advantage in prop trading, it can also amplify losses if not managed properly.

Frequently Asked Questions

What is the meaning of proprietary trading?

Proprietary trading refers to the practice of a financial institution or firm using its own capital to trade financial instruments for potential profit.

Can you provide a simple example of proprietary trading?

An example of proprietary trading is when an investment bank uses its own funds to buy and sell stocks, bonds, or other financial instruments with the aim of generating profits.

Is proprietary trading considered illegal?

No, proprietary trading is generally not illegal. However, regulations and restrictions may vary across jurisdictions.

Is proprietary trading a challenging thing to do?

Yes, proprietary trading can be challenging due to the complexity of financial markets, the need for accurate analysis, and the inherent risks involved.

Is proprietary trading a promising career choice?

The suitability of proprietary trading as a career varies for individuals. It offers potential financial rewards but requires substantial skills, discipline, and risk management.

What is the typical salary of a proprietary trader?

A proprietary trader’s salary can vary widely depending on factors such as experience, performance, and the firm they work for. It can range from moderate to high six-figure or even seven-figure amounts.


Proprietary trading offers significant advantages, such as high profit potential and freedom to make independent trading decisions. However, it also carries risks and challenges. Successful prop trading requires a deep understanding of financial markets, robust strategies, diligent risk management, and adherence to regulatory norms.

Firms like those we’ve discussed have set high standards in the industry. Aspiring prop traders must be prepared for a learning curve and a challenging, yet potentially lucrative, career path. Remember, due diligence and continuous learning are key to success in the field of trading.

Author: CoachShane
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.