The Complete Guide to Proprietary Trading For Beginners

Proprietary trading firms are companies that trade stocks, bonds, and other financial instruments on behalf of institutional investors. Best proprietary trading firms are also referred to as prop traders or prop shops. These firms are generally banks and hedge funds but may also be mutual fund groups, asset management companies, or other financial institutions. A proprietary trader makes trades on behalf of the firm’s capital and assets rather than those of clients.

Proprietary trading is a broad term that can include several strategies and activities. For example, some prop traders specialize in trading liquid market instruments like stocks and exchange-traded funds (ETFs), while others focus on futures or options contracts. Some prop traders focus on short-term trading strategies, such as swing or day trading. Other prop traders use long-term investment strategies, such as arbitrage, merger arbitrage, and event-driven investing.

Prop traders can often be found in fast-paced offices where the phone rings constantly and data streams at an incredible pace across computer screens. Traders usually need to be good with numbers and possess strong analytical skills; most have math or economics degrees from top universities, with some entering the field with advanced degrees in finance or statistics.


How does a proprietary firm work?

Proprietary trading firms are companies that trade securities for their accounts. They are not required to register as broker-dealers because they do not solicit any customers. Still, they can be registered in other capacities, such as investment advisers or companies.

The media invented the term proprietary trading, and most firms prefer to use the term “proprietary” over “prop” to describe their businesses. Proprietary trading is a highly attractive business model for investors because it provides them with exposure to financial markets without the liability of being a broker-dealer.

The proprietary business model can stretch across multiple divisions within a single firm, and it is often used to manage the risks associated with various assets within the portfolio of an investment bank. Many of the largest banks on Wall Street have proprietary trading desks that trade daily bonds, currencies, commodities, and equities.

Proprietary trading desks can also trade for their account outside their parent firm. For example, Goldman Sachs has established investment management businesses (GSAM) that include high-frequency trading operations and traditional asset management services such as mutual funds and hedge funds.


The backbone of proprietary trading firms teams

First, proprietary is defined as “belonging exclusively to one person or group.” In the financial markets, a proprietary trading company is a firm that employs only its capital in making investments on behalf of its traders.

A proprietary trading firm typically has a team of analysts and traders who use their money to make trades. It differs from an investment bank, in which the firm can use its clients’ money to make trades.

Best proprietary trading firms generally have proven track records. They are often started by former hedge fund managers or other professionals with experience in the industry. Most proprietary trading firms have an experienced staff. Therefore, they offer various services, including managing assets, providing research and analysis, institutional sales and marketing, market-making, and risk management services.

Proprietary trading firms are usually structured with two separate legal entities: a Securities Trading Advisor (STA) and a Broker Dealer (BD). The STA is registered to sell securities for resale and trade for itself. The BD entity is used for clearing transactions and is not involved in securities sales activities.


How to get into proprietary trading?

With the tides of the stock market moving in favor of traders, one may wonder whether it is time to join the party. One may have friends or family members who have been successful trading stocks, and this can be a powerful influence on your own decision to become a trader.

To make an informed decision, it is important to understand exactly what proprietary trading entails.

In proprietary trading, you essentially work for yourself as a private trader. You need to set up your trading accounts and trade through these accounts. You are in charge of your own money and can trade with several brokers.

This type of trading is riskier than other stock market trading because you do not have the same protections as an employee at a brokerage firm. When you work as an employee at a larger company, you typically receive training and support from seasoned traders. However, if you are trading on your own, you will not have this luxury.


Companies that help to learn proprietary trading

There are many reasons to choose a proprietary trading firm; the topic can be confusing. However, the process becomes much easier if you know what to look for in a proprietary trading firm.

To help you make an informed decision, here is a list of the best proprietary trading firms that provide training opportunities for new traders and customers.

CitiGroup’s Global Markets Inc. Provides access to online tools and resources that help you become more knowledgeable about the markets. For example, their Investment Banking and Capital Markets Institute (IBACMI) offers courses such as Introduction to Derivatives Trading,

Understanding the Foreign Exchange Market, and Financial Statement Analysis, which can improve your understanding of different market aspects.

Barclays Global Investors provides research tools that track market activity, such as foreign exchange rates and various indices based on commodity prices, interest rates, or stocks. In addition, they offer customized training sessions through their derivatives sales team or other topics of interest.

Citigroup Global Markets has an extensive training program that includes webinars on market basics and mini-courses on specific topics such as fixed income or asset class analysis. The programs also include credit analysis or liquidity risk management workshops that can enhance your trading skills.


Benefits of proprietary trading firms

When it comes to making large investments, most people are familiar with buying stocks—buying a piece of a company in the hopes that its value will rise and you’ll make money. But sometimes, that’s not enough for people who want to make the most of their money.

To maximize their returns, some investors may decide to trade stocks using their own money. This practice is called proprietary trading—trading with funds from your bank account instead of trading on behalf of someone else—and it can be more lucrative than investing through a traditional broker or simply choosing stocks.

Proprietary trading firms are businesses that operate similarly to other companies but focus on trading stocks as a core source of revenue. They’re generally smaller than firms that handle other kinds of business, and they need to show significant growth to stay afloat. However, they do offer many benefits over traditional brokerage firms:


  • Because best proprietary trading firms are smaller, they can offer individualized attention and customization, which might be difficult for bigger companies.
  • They’re able to access information earlier than larger competitors.


Because they’re focused solely on trading stocks, they have an intense knowledge base about the market and how it works.