The global market for proprietary trading was valued at $6.7 billion in 2020, and forecasts place its annual growth at 4.2% through 2028.
In the U.S. alone, monthly searches for prop firms grew more than fivefold between 2020 and 2025, reaching over 46,000.
This increase creates a sharper market signal. It may also indicate that more investors want to add proprietary trading to their short-term investments or long-tern investments.
With more traders entering and more firms competing for attention, access to tools, evaluations, and funding has widened.
However, it compresses margins for error, pushing both traders and firms to operate with greater precision.
So, if you want to become a proprietary trader, this guide will help you understand proprietary trading.
What Is Proprietary Trading?
Proprietary trading, or prop trading, occurs when a financial institution uses its own capital to buy and sell assets for profit, rather than executing trades on behalf of clients.
These positions include stocks, bonds, commodities, currencies, and other financial instruments. Unlike client-driven activity, these trades reflect the firm’s risk appetite and market view.
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How Does Proprietary Trading Work?
Prop trading operates through desks that are firewalled from retail or institutional client services.
These teams use a trading account tied to the firm’s balance sheet to enter positions the institution holds directly.
Additionally, execution runs through high-speed trading platforms supported by proprietary algorithms and real-time data feeds.
Any delay can affect performance, so the infrastructure must align with execution speed and precision.
Why Do Firms Engage in Proprietary Trading?
The profit model for proprietary trading is straightforward: capture full gains instead of partial commission fees.
Firms believe they possess unique advantages, such as exclusive data and in-house models, to outperform market returns.
By trading on their own account, firms retain 100% of the profit from each transaction. This structure avoids the margin constraints of executing trades on behalf of customers.
It also serves as a diversification tool. Many financial firms use prop trading to balance out income sources, especially during periods when advisory fees or asset management inflows decline.
Furthermore, using internal models and trading software helps sharpen execution, offering an edge that retail flow doesn’t provide.
What Is the Volcker Rule on Proprietary Trading?
The Volcker Rule, part of the Dodd-Frank Act, restricts banking entities from trading specific securities for short-term gain using their own capital.
It aims to prevent deposit-backed institutions from taking excessive risks unrelated to serving clients.
This rule still permits market-making, underwriting, government security trading, and hedging, but only under specific guidelines.
These include caps on capital allocation, strict compliance reporting, and restrictions aligned with applicable law.
These rules aim to prevent conflicts of interest, exposure to high-risk assets, and instability within the U.S. financial system.
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Types of Proprietary Trading Strategies
Proprietary strategies aim to isolate market inefficiencies using the following precision-based methods:
Statistical Arbitrage
In statistical arbitrage, firms apply algorithms to detect short-term pricing dislocations between correlated financial instruments.
This proprietary trading strategy uses mean reversion analyses, allowing firms to invest in diverse portfolios with thousands of securities within a short period of time (generally a few seconds up to multiple days).
Merger Arbitrage
Merger arbitrage targets pricing gaps created during mergers or acquisitions.
Traders build positions based on announced deals by taking long exposure in the target company and shorting the acquirer.
The value lies in the spread between the current market price and the announced contract terms.
This proprietary trading strategy requires accurate probability assessments of regulatory approval, financing terms, and closing timelines.
Traders must also hedge deal breaks, which can sharply move such securities against them.
Global Macro Trading
Global macro trading positions are driven by forecasts related to interest rate cycles, inflation, geopolitical shifts, and central bank policy.
These trades span currencies, commodities, and sovereign debt. Execution is typically directional and depends on a trader’s ability to time exposure based on large-scale macro indicators.
Macro strategies also rely on cross-asset views to manage correlation risk across financial instruments.
Volatility Arbitrage
Volatility arbitrage focuses on discrepancies between implied and realized volatility. Traders often use options to build delta-neutral setups that isolate volatility risk.
These positions react to shifts in market stress using derivatives tied to equity or currency markets.
This proprietary trading strategy demands frequent recalibration, particularly when realized volatility changes faster than anticipated, making the cost of adjustment material to profit or loss.
Market Making
Market making involves quoting buy and sell prices to support trading in specific assets. This strategy holds a standing obligation to provide two-sided markets, which contributes to liquidity.
Profit comes from the bid-ask spread and effective inventory management.
Many financial firms engaged in market making also run proprietary risk on their own account, especially when client flow is low or directional conviction is high.
High-Frequency Trading (HFT)
HFT strategies rely on execution speed and access to premium trading platforms. These strategies submit thousands of orders per second to capture micro-inefficiencies.
At the same time, performance generally depends on low-latency access to exchange infrastructure, co-located servers, and customized algorithms.
Prop traders using HFT must also control for order-to-trade ratios and adverse selection risk.
Fundamental Analysis
Fundamental analysis involves evaluating financial reports, balance sheet ratios, and forward guidance to assess valuation.
This is commonly applied to stocks, where long positions reflect confidence in earnings growth and debt structure.
In proprietary trading environments, analysts may also combine this with technical analysis or macro overlays to support timing decisions.
In addition, valuation assumptions are measured against each firm’s required rate of return (RRR).
News Trading
News trading uses market reaction to news events, such as policy changes, economic data releases, or M&A deals, to find short-term trades.
Traders scan for rapid sentiment shifts across clients and customers, especially when pricing hasn’t yet reflected updated expectations.
These positions usually use trading software programmed to scan for keyword-driven volatility triggers. Speed of entry and clarity of risk levels are also crucial.
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Benefits of Proprietary Trading
Here are the benefits of proprietary trading for firms and individual traders:
Proprietary Trading For Firms
For proprietary trading firms, the benefits include:
Maximize Profit Potential
By using their own capital and executing trades internally, firms retain the full profit instead of sharing fees with clients. This allows for compounding gains and cleaner P&L reporting.
When proprietary trading strategies outperform, the entire return flows directly to the firm.
This structure aligns resources with high-conviction positions instead of relying on volume-based advisory income.
Leverage Firm Capital for Bigger Trades
Access to institutional funding lets proprietary trading firms scale trades beyond what individual accounts can manage.
Larger position sizes can improve execution quality, particularly when firms transact in liquid financial instruments or institutional block trades.
This capital advantage gives them pricing power and greater flexibility to pursue time-sensitive setups without disrupting the market.
Use Advanced Trading Tools and Research
Proprietary trading desks typically operate with dedicated infrastructure.
This infrastructure includes firm-built trading platforms, data feeds tailored to internal systems, and algorithmic models tuned to specific asset behavior.
These tools integrate with risk controls and compliance requirements, enabling execution across different financial institutions and regulatory environments.
Collaboration with research teams also strengthens statistical modeling and deployment precision.
Strengthen Market Influence and Liquidity
Proprietary trading firms with consistent market presence can act as liquidity providers, particularly in thin or volatile sessions.
Their ability to place two-sided quotes improves order book depth and gives counterparties reliable access.
This market-making role can generate consistent income from bid-ask spreads while also supporting relative-value trades that require exposure to multiple financial instruments.
Maintain a Strategic Inventory of Securities
Proprietary trading desks generally carry an inventory of trading assets for operational and strategic reasons.
Holding these positions lets firms facilitate large client flows or internal hedging without relying on third-party execution.
Inventory can also be used for arbitrage or index arbitrage opportunities, giving the desk an additional source of return beyond pure directional exposure.
Proprietary Trading for Individual Traders
For individual traders, the benefits include:
Trade Without Risking Personal Capital
Many proprietary traders operate under firm sponsorship. They access institutional capital while trading within predefined risk limits.
This lets them focus on refining strategies without using their own money or worrying about personal drawdowns.
In return, they follow the firm’s internal rules, reporting structure, and allocation processes.
Earn More Through Profit-Sharing Models
Proprietary trading firms usually offer performance-based payout structures.
Depending on their consistency, risk discipline, and scaling ability, high-performing traders can receive between 70% and 90% of profits generated on their own accounts.
These models give traders higher earnings potential than traditional brokerage or salaried roles.
Gain Access to Training and Trading Support
New traders receive structured mentorship, daily reviews, and access to simulated environments to test new methods.
This proprietary trading training accelerates strategy development and improves risk management habits.
Combined with real-time analytics and internal data tools, it gives new entrants the structure needed to perform under firm conditions.
Avoid Day Trading Restrictions with Firm Accounts
Proprietary trading through a sponsored trading account allows individuals to bypass retail day-trading restrictions.
This includes the pattern day trader rule and capital minimums required for frequent trades.
With a firm account, traders can execute short-horizon setups, like scalping or intraday arbitrage, without breaching regulatory thresholds on brokerage rules.
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Risks and Challenges of Proprietary Trading
Like many investment strategies, proprietary trading has limitations. Below are its risks and challenges:
Market Volatility
Rapid price swings can cause unhedged positions to hit stop levels or blow through daily limits.
These swings can coincide with macroeconomic reports, central bank decisions, recession, or unexpected geopolitical shifts.
Proprietary trading firms need real-time monitoring and circuit breakers in their trading software to manage exposure when volatility exceeds forecasted levels.
Credit Risk and Counterparty Exposure
Default risk exists anytime a firm trades bilaterally, especially with derivatives or contract-based instruments.
If a counterparty fails to deliver, even a profitable trade can become a realized loss.
Credit departments mitigate this by spreading exposure across multiple counterparties and requiring strict collateral terms.
Liquidity Risk During Market Stress
When market depth collapses, especially in commodities or small-cap stocks, firms may struggle to exit positions without triggering adverse price movement.
As a result, thin liquidity increases slippage and exposes trades to price gaps.
Reserve capital and pre-set liquidity thresholds are generally used to prevent forced exits at unfavorable prices.
For instance, adequate recession preparation includes stress-testing capital buffers and exit strategies.
Operational Risk From Systems and Human Error
Technical faults, such as order mismatches, platform outages, or logic errors, can result in unintended losses.
These failures usually come from coding mistakes or poor system validation during software updates.
To reduce these errors, proprietary trading firms implement testing cycles, real-time alerts, and isolated environments for deploying algorithmic updates.
Regulatory Risk and Changing Compliance Rules
Regulations like the Dodd-Frank Act introduced limits on proprietary trading activity for commercial banks and other insured entities.
These rules vary across jurisdictions, and firms with global desks must align trading behavior with applicable law across every region they operate in.
Regulatory demands may also intensify during international conflicts, as sanctions and cross-border restrictions evolve rapidly.
Frequent audits, surveillance tools, and compliance reporting are required to stay in line.
Drawdown Risk and Capital Restrictions
Most proprietary trading programs enforce strict drawdown limits per trader and per desk.
Once breached, traders can lose access to capital or be required to reset their account.
These limits prevent firmwide losses but can disrupt momentum for traders with longer strategy horizons.
Managing risk per trade and across sessions becomes non-negotiable under these conditions.
Over-Leverage
Over-leveraging magnifies exposure beyond what volatility can reasonably support.
A modest move against the position can eliminate capital allocation or trigger margin liquidation.
Firms combat this by enforcing tighter margin requirements and requiring stop-loss logic on all positions, particularly for intraday and high-frequency setups.
Performance Pressure and Trader Turnover
Performance reviews happen frequently, and underperformers often lose capital access quickly.
These evaluations focus on profitability, adherence to rules, and behavioral discipline. Without consistency, turnover is common.
While high achievers scale fast, traders who miss targets may be removed within weeks or months.
Limited Control Over Trading Strategies
Proprietary trading firms usually assign capital based on approved methods, which limits freedom to test unvetted ideas.
If a trader wants to pursue a new sector or asset class, it usually requires a formal risk review.
This approval process ensures alignment with firm guidelines but can delay implementation of promising strategies or restrict adaptability in fast-moving conditions.
Psychological Risks and Emotional Stress
The structure of proprietary trading includes constant evaluation, financial risk, and real-time decision-making under pressure.
Without scheduled breaks or psychological training, this environment leads to mental fatigue.
Overtrading, revenge trading, and premature exits are common among traders operating without emotional safeguards.
Lack of Differentiation in Competitive Markets
As strategies become more public, especially in short-term or quant-based setups, competition erodes profit margins.
Proprietary trading firms that rely on third-party models or recycled signals can find themselves in crowded trades.
To avoid this, successful desks invest in internal research and maintain data pipelines that provide exclusive insights across other instruments.
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Types of Proprietary Trading Firms
The two categories of proprietary trading firms are independent prop firms and brokerage firm desks.
Independent Proprietary Firms
Independent proprietary trading firms operate with their own capital, enabling them to pursue strategies without external influence.
These firms don’t manage client funds and aren’t bound by advisory mandates.
Additionally, they pursue tactical or short-horizon approaches, focusing on internal performance rather than asset gathering.
They also operate outside the scope of traditional advisory structures and manage all trade risk and compliance internally.
Without institutional backing, they maintain strict discipline in capital allocation, risk oversight, and technology investment.
Brokerage Firm Desks
Operating within the larger infrastructure of a brokerage, these desks may have access to flow trades that offer insight into market movements.
This access helps them identify shifts in liquidity, prominent block positioning, or unusual volume activity.
While they generally trade for the firm’s own account, their operations are subject to tighter oversight, especially when part of large banks.
How Proprietary Trading Firms Operate
Proprietary trading firms allocate internal capital to traders who have demonstrated reliable performance or show high potential through evaluations.
Their structure and revenue models are as follows:
Firm Structure
Capital distribution is at the center of these proprietary trading firms’ functions. The firm backs each trading account, not personal funds.
Traders access firm-funded resources, including analytics dashboards, tick data, and integrated order execution systems.
This model allows firms to scale talent while keeping execution quality and strategy discipline under one roof.
- Capital: Supplied directly by the firm, tied to trader performance metrics and consistency.
- Trading Platforms: Configured in-house or licensed, enabling execution across global markets.
Revenue Models
Firms generate revenue by capturing a share of profits generated on live trades.
Profit-split ratios vary depending on the firm, trader experience, and risk profile of the strategy.
Some firms offer scaling incentives where top performers receive more capital allocation.
The firm bears drawdown risk, which is why strict rules are in place regarding max loss, holding periods, and trade type.
- Profit Split: Set percentages (e.g., 70/30 or 80/20) based on performance, reviewed periodically.
- Profits: All revenue derives from the success of live trades using firm capital, not from clients or asset fees.
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How to Become a Proprietary Trader
If you want to become a proprietary trader, below are the steps for becoming one:
Build the Right Education and Knowledge Base
To build an educational background relevant to proprietary trading, do the following:
Build a Strong Academic Foundation in Finance or Tech
A background in statistics, linear algebra, or computer science provides a valuable base for quant-driven strategies.
Candidates familiar with derivatives, data modeling, and programming (e.g., Python or R) can build algorithmic models for backtesting and signal generation.
Practical coursework or internships in market-facing roles are also helpful.
Study Financial Markets and Trading Strategies
Understanding both technical analysis and macro-driven fundamentals helps candidates navigate asset price behavior in proprietary trading.
Exposure to multiple asset types, such as stocks, commodities, and futures, teaches how volatility, liquidity, and timeframes differ across markets.
Boost Your Credibility With Industry Certifications
Certifications like the CFA or FINRA licenses (e.g., Series 57 or Series 7) enhance proprietary trading credibility.
They show compliance knowledge and signal a working grasp of ethics, capital markets, and valuation.
While not always required, they are usually preferred by firms affiliated with a banking entity or subject to regulatory oversight.
Develop Core Skills for Proprietary Trading
For proprietary trading core skills, here’s how to develop them:
Practice With Simulators to Gain Hands-On Experience
Use proprietary trading demo environments to run and refine strategies in real time.
These simulators mirror actual market conditions and allow testing without financial risk.
Journaling trades and analyzing P&L stats also builds the habit of structured performance tracking.
Trade With Personal Capital to Understand Market Behavior
Even small personal accounts can expose new traders to live market dynamics, emotional discipline, and execution pressure.
The transition from simulated to real-money trading highlights mistakes in sizing, entry timing, or psychological response that don’t always surface in demos.
Master Risk Management Techniques for Long-Term Survival
A working risk framework includes a defined maximum loss per trade, session stop-out limits, and a volatility sizing plan.
Traders must understand how to protect equity and avoid disqualifying drawdowns.
Proprietary trading firms often test for this through strict daily and cumulative limits during evaluations.
Sharpen Analytical Thinking and Data Interpretation
Learn to analyze raw data and convert it into executable insights.
This includes building models that flag trade setups, backtesting with realistic slippage, and identifying when a strategy no longer performs.
Firms require this level of self-sufficiency before allocating significant capital.
Strengthen Emotional Discipline and Trading Psychology
High-pressure proprietary trading environments test mental clarity. Traders must manage loss aversion, hesitation, and overconfidence.
Using checklists, scheduled breaks, and psychological self-monitoring helps maintain consistency, especially during volatile sessions or after losing trades.
Commit to Lifelong Learning and Strategy Evolution
Since markets evolve, traders must revise methods, explore new sectors, and adapt to shifting volatility regimes.
Continuous education, structured post-trade reviews, and workshop participation help traders remain effective as markets and financial instruments change.
Find the Right Proprietary Trading Firm
Finding the right proprietary trading firm involves the following strategies:
Apply to Traditional Prop Trading Desks and Internships
Top-tier prop firms generally recruit from university programs or through direct outreach.
Interns and junior candidates must demonstrate numerical reasoning, market awareness, and model-building ability.
Submitting proprietary trading case studies or trade logs also increases your credibility during the interview process.
Explore Remote Firms and Funded Trader Programs
Online programs now allow traders to qualify for capital through performance-based evaluations.
These proprietary trading firms assess trades based on P&L, drawdown control, and rule compliance.
While structures vary, they can offer profit splits and ongoing funding for consistent performance.
Network With Industry Professionals for Insider Opportunities
Engaging with proprietary trading communities, alumni groups, and digital forums can lead to referrals and mentoring.
These networks also give insights into firm culture, evaluation expectations, and career longevity.
As a result, active participation in these circles leads to early access to hiring cycles.
Pass the Evaluation and Interview Process
Here’s how to pass proprietary trading firms’ evaluations and interviews:
Prepare for Trading Challenges and Profit Benchmarks
Proprietary trading evaluations test performance under predefined rules, such as daily targets, max drawdown, and trade caps.
Traders must manage risk precisely while hitting benchmarks.
Simulating these conditions ahead of time prepares candidates to perform under identical expectations during the real challenge.
Showcase Your Trading Strategy and Experience in Interviews
Candidates should come prepared with annotated trade logs, risk metrics, and proof of edge.
Being able to clearly explain how a strategy works, when it fails, and how risk is controlled makes the difference between selection and rejection.
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Future of Proprietary Trading: Trends & Predictions
Proprietary trading continues to evolve as firms reallocate resources toward faster execution, adaptive models, and nontraditional markets.
One of the most defining shifts is the use of machine learning to optimize trade logic.
Many financial firms now train models to identify trade entry, size, and exit across datasets that include tick-level price feeds, order book depth, and real-time volatility.
These models adapt faster than static rule sets, especially in high-variance conditions where fixed strategies underperform.
Simultaneously, adoption in crypto markets has grown. Many prop traders now deploy strategies in digital assets like NFTs, using volatility as a core feature rather than a risk to reduce.
Another development is the broad move toward algorithmic infrastructure.
As the proprietary trading field becomes more tech-dependent, the barrier to entry will rise for discretionary-only traders.
Proprietary trading firms will also continue prioritizing scalable processes, data fluency, and low-latency architecture over personal instinct or narrative-based setups.
Fintech investment is fueling these technological breakthroughs in trading systems.
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Proprietary Trading vs. Other Trading Forms
| Category | Proprietary Trading | Client Trading | Hedge Funds | Online Trading |
|---|---|---|---|---|
| Capital Source | Trades with firm’s own capital | Uses client funds to execute trades | Manages external investor capital | Trades with trader’s own money |
| Profit Model | Firm keeps 100% of profits | Earns commissions or fees for executing trades | Charges management and performance fees | Gains or losses absorbed by the individual trader |
| Trader Role | Employed or contracted prop traders execute strategies for the firm | Acts on behalf of clients following fiduciary standards | Portfolio managers invest capital from limited partners | Individual makes all decisions and trades personally |
| Regulatory Oversight | Subject to internal controls and applicable law; limited by Dodd-Frank Act if part of a bank | Heavily regulated to protect customers | Registered with the SEC; must disclose to investors | Bound by standard retail investor protections |
| Resource Access | Uses institutional-grade trading platforms and research tools | Access tied to broker infrastructure and execution needs | Relies on internal research and high-level risk models | Limited to available trading software and free data sources |
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Conclusion
Proprietary trading gives firms direct access to market profits without relying on client funds.
While it enables fast decision-making and tighter control over strategy execution, this autonomy comes with accountability, especially when trades involve complex financial instruments or volatile markets.
If you’re considering this path, assess whether your strategy is data-driven, can operate within tight rules, and fits within a firm’s risk structure.
Compare prop firms by contract terms, profit splits, risk limits, and the infrastructure they provide, such as trading platforms, training, and support.
But if you’re building your own track record, focus on controlling drawdowns, documenting trade logic, and improving execution quality across different market conditions.
For longer-term growth, develop systems that scale and maintain under audit, automation, or institutional review.
Lastly, before committing to any prop firm, confirm program terms, funding conditions, and compliance expectations directly on their official site.
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Proprietary Trading FAQs
Can Banks Engage in Proprietary Trading?
The Volcker Rule restricts large banks from using their own account to conduct short-term trades in securities, derivatives, commodity futures, and other instruments.
The intent is to prevent conflicts between speculative activity and services provided on behalf of clients, particularly in institutions that hold depositor capital.
While hedging and market-making functions remain allowed, compliance requirements are extensive and tightly enforced.
How Do Proprietary Trading Firms Generate Revenue?
Proprietary trading firms trade their internal funds using strategies such as index arbitrage, momentum modeling, or volatility spreads.
Revenue comes from direct trade profits. Most structures involve profit splits between the firm and individual prop traders, based on net performance after risk and cost adjustments.
Can Individual Traders Join Proprietary Trading Firms?
Yes. Most firms offer evaluation programs in which candidates must demonstrate profitable strategy execution and risk control under real or simulated conditions.
Once approved, traders receive access to a proprietary trading firm-backed trading account and operate under strict capital rules and contract terms.
