Definition of Prop Trading

What is the definition of "prop trading" or "proprietary trading"?

A "prop trading" firm is a company that puts its own capital to work in the markets, rather than the capital of their clients.

A "prop trading" firm will engage in the trading of its own capital. This differs from a hedge fund, which will largely trade the capital of the clients at the fund.

At some prop firms, traders will receive a base salary and a potentially lucrative bonus structure. These traders will engage in the trading of stocks, bonds, options, etc. in an effort to make money for the firm.

If they do well, then the traders will be compensated through a bonus structure.

If they don't do well, then the traders will oftentimes be let go in short order. The proprietary trading business is notoriously cutthroat.

In some cases, you will have smaller "prop firms" that will require an outlay of capital from a potential employee in order to trade at the firm.

For instance - a smaller firm may require that a trader put up $10,000 in order to trade for the firm. In return, the firm will offer substantial leverage and the opportunity to make a great deal of money. In these situations, the firm and trader will often enter into some kind of a profit-sharing agreement.

Some firms will mandate their any perspective traders enroll in mandatory "training" courses, which of course usually cost a great deal of money.

As with any industry, there are reputable firms and firms of ill repute. Firms that promise the world and then look to charge you for expensive training courses should be avoided at all costs.

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