Proprietary Trading - Everything You Need To Know About (2024)

Every day, thousands of talented traders around the world enter the realm of proprietary trading. There, they have an opportunity to build a career buying and selling shares, futures, forex, and crypto products.

Read on to learn more about prop trading and how proprietary traders make a good living in the financial markets.

What is Prop Trading?

Proprietary trading is the act of a company (prop firm) hiring third parties (prop traders) to trade their capital. The prop firm allocates risk capital to the prop traders; in return for their services, traders are awarded a profit split.

To determine trader acuity, the proprietary trading firm follows a qualification process. Let's follow the journey of an average retail trader (Trader A) and their transition to becoming a professional prop trader:

1. Trader A pays a nominal audition fee.
2. Trader A undergoes a "challenge" or "evaluation period."
3. Trader A passes the challenge.
4. Trader A receives a funded account.
5. Trader A is refunded the audition fee and begins trading real money.
6. If profitable, Trader A gets a split of any realized gains.

Unlike a hedge fund or investment bank, prop trading is all-inclusive. If you are a talented trader, you can build a career buying and selling financial instruments. Pass the challenge, receive a funded account, and you're in. Simple as that.

Types of Prop Trading

Prop firms come in all shapes and sizes. However, there are three main types of these outlets: traditional prop firms, prop shops, and funded trading accounts. Each is unique and specializes in certain areas of the proprietary trading space.

Traditional Proprietary Trading Firms

Traditional proprietary trading firms are the longest-standing form of prop trading. It is the most restrictive form of proprietary trading and has several rigid components.

First, a traditional global prop trading firm utilizes a mix of trader and firm capital. Second, traders must be certified by local regulators, such as the UK Chartered Institute of Securities and Investments. Lastly, special technology-oriented skills may be required to add value to the firm's market-facing operations.

Prop Shops

A prop shop is a firm where the trader puts up a significant amount of risk capital. Prop shops offer traders market access and additional purchasing power. A positive track record is ideal for candidates, although no formal qualifications are required.

Remote Prop Trading Firms - Funded Trading Accounts

The top proprietary trading firms are found online in the global macro trading environment. Remote prop trading firms offer talented individuals the ability to earn a funded trading account.

No qualifications, experience, or capital are required. Anyone can earn a funded account and trade it remotely from home or office. Many of the best prop trading firms in the world furnish remote traders with funded accounts.

Prop Trading vs. Hedge Funds

Although both prop firms and hedge funds manage large quantities of capital, there are several key differences between the two. Below are three of the largest:

1. The capital of prop firms is managed by their traders. Hedge funds staff fund managers to balance the assets of the firm.
2. A person doesn't have to be licensed to work as a prop trader; fund managers are subject to regulatory oversight.
3. Hedge fund managers are required to adhere to company-approved trading strategies. Prop trading firms allow their traders to engage the market as they deem fit.

Prop trading opens the financial markets to the masses. Regardless of one's background, education, and experience, it's possible to profit from prop trading. In many ways, the prop industry democratizes the global marketplace by funding anyone with the trading skills to consistently profit.

Volcker Rule & Prop Trading

The Volcker Rule states that banks cannot trade securities, derivatives, commodities, futures, and options for their accounts. It defines this act as being proprietary trading. Accordingly, the rule limits interactions between banks and hedge funds, prop firms, and private equity funds.

The Volcker Rule stemmed from the Global Financial Crisis of 2008. Upon the bursting of the subprime mortgage bubble and subsequent credit freeze, steps were taken to limit the trade of securities by banks.

Prop Trading - How To Get a Funded Trading Account and Start Trading

If you're a prop trader, then the proprietary trading firm is your partner in the marketplace. So, it makes sense to focus your business on only the best proprietary trading firms. That's why we believe the ecosystem at HowToTrade is head-and-shoulders above the rest.

At HowToTrade, we furnish aspiring prop traders with the education, market analysis, and support they need to build a career in the markets. Featuring video tutorials, around-the-clock analysis, 24/7 chat, and proprietary trading access, HowToTrade is your all-in-one portal to the marketplace.

Additional Resources On Prop Trading

Looking for more information? Check out these three articles to boost your understanding and scrutinize the prop trading industry in depth.