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What Is A Prop Trader?

Haiden Holmes

Oct 24, 2022 17:33


Prop trading refers to a sort of trading in which corporations use their own proprietary funds. Prop traders do not provide services to clients; rather, they speculate on behalf of the firm. The objective of prop trading is to generate profits for the firm. Prop trading has a lot of benefits, including the ability to test new investment strategies and the opportunity to become a powerful market maker. Becoming a prop trader can be a terrific option for market aficionados who want to make a profession trading. To become a proprietary trader, you must understand what proprietary trading is and its advantages and downsides.

What Is A Prop Trader?

At its most fundamental level, a Prop Trader is any individual who trades with a financial institution's capital or other people's money. Proprietary trading firms permit proprietary traders to utilize the firm's capital to generate profits and divide the earnings with the firm in accordance with a predetermined agreement.

Proprietary traders concentrate on a single market or asset, such as stocks, options, ETFs, commodities, FX currency pairs, and futures contracts. Using the firm's funds and various trading tools and services, they intend to establish a structure and profitable trading methods to obtain a portion of the profits generated through the day and swing trades.

Typically, prop trading companies do not provide contractors with a base income. However, some proprietary trading businesses offer their prop traders a minimum monthly wage so they can focus only on achieving the best trading performance.


Consequently, a set portion of profit will be deducted from your monthly earnings. In this regard, most prop trading firms offer a profit split between 25% and 50%; however, other firms offer a profit distribution of up to 75%.

What Exactly Is Proprietary Trading?

Proprietary Trading (Prop Trading) occurs when a bank or company trades stocks, derivatives, bonds, commodities, or other financial instruments for its own account, using its own money rather than client funds. This allows the firm to make entire profits from trade instead of only commissions for processing trades for clients.

This form of trade is conducted by banks and other financial entities with the intention of generating excessive profits. When it comes to market intelligence, such organizations typically have an advantage over regular investors. Having powerful modeling and trading tools is another benefit.

To optimize gains, proprietary traders employ tactics such as merger arbitrage, index arbitrage, global macro-trading, and volatility arbitrage. Proprietary traders have access to sophisticated technologies and a wealth of data to assist them in making critical judgments. Sourcian is a dedicated platform for the recommendation of the best manufacturers. Your sourcing journey starts right here at sourcian.

Even while proprietary trading is usually perceived as dangerous, it is frequently one of the most profitable operations of commercial and investment banks. During the 2008 financial crisis, organizations such as prop traders and hedge funds were scrutinized for contributing to the disaster. The Volcker rule, which severely restricted proprietary trading, was implemented to govern the operations of proprietary traders. The primary concern was avoiding potential conflicts of interest between the firm and its clients. Prop trading is not advantageous for individual investors because it does not include deals performed on behalf of clients.

How Does A Prop Trading Company Work?

As previously stated, a prop trading corporation is often a large financial institution that engages in direct stock market activity. Prop trading happens when a financial institution's trading desk uses the institution's resources and accounts to engage in self-promotional financial trades. These transactions are typically speculative and are executed via various derivatives or other complicated investment instruments.

However, it is not the corporation as a whole that engages in the trades; rather, it is the firm's prop traders. A prop trader enters into an agreement with the organization as an independent trader, not as an employee or client, to execute day trades through the organization's account. The transactions are conducted with company funds.

To become a prop trader, you must first deposit a sum, typically referred to as a risk contribution. Your risk contribution influences the amount of leverage the company grants you. Surely you are curious as to why it is called risk contribution, and this is because any trading losses are mitigated by the trader's initial deposit (risk contribution).


The risk contribution demonstrates that you have the company's best interests in mind and will not engage in excessively hazardous deals because you will also lose money. The corporation, not the prop trader, is the party to every stock trade, and as such, it is the firm that incurs any losses.

Hedge Fund vs. Prop Trading

Client funds are invested in the financial markets by hedge funds and are compensated for producing profits from these assets. When proprietary traders invest in the financial markets with their own firm's funds, they keep the entire profit. In contrast to proprietary traders, hedge funds are accountable to their investors. However, they are also targets of the Volcker Rule, which tries to restrict the amount of risk financial institutions can assume.

Prohibitional trading tries to boost a company's balance sheet by investing in the financial markets. Since they are not dealing with client funds, traders can take larger risks. Firms engage in proprietary trading with the idea that they possess a competitive advantage and have access to significant information that will enable them to generate substantial profits. The traders exclusively answer their respective firms, and the firm's clients do not profit from the profits generated via prop trading.

Should You Consider A Career As A Prop Trader?

Being a prop trader has both benefits and drawbacks. It provides the trader with access to capital to increase profits. This further decreases the trader's risk, as his investment is restricted to fees and taxes. Prop traders enjoy a level of independence that does not accompany a typical profession.


  • Access To Larger Capital

With the same amount of funds that you would put into your trading account, you may gain access to a higher quantity of capital from the outset. It's a practical method for leveraging your progress as a prop trader. 

  • Accelerated Profit Potential

If your personal trading account is too small to generate a huge return and you still want to become a full-time trader, prop trading is the way to go. Trading with a prop firm will enable you to produce huge profits while risking little to no of your own cash.

  • Little Risk, High Reward

After paying the initial access price, you will not be responsible for any losses since the company will assume and manage the risk. This provides you with the mental tranquility required to work better without fear of losing significant sums of wealth.

  • Accelerated Account Growth

As demonstrated previously, if you had access to prop trading money, your account would grow and scale more quickly than if you traded your own account.

  • Building a Professional Track Record

You can use your track record in proprietary trading to demonstrate to other investors that you have competently managed substantial funds. In addition, your credibility will increase as a result of the Domino Effect. More individuals will put their faith in you and your trading abilities if they know you can trade OPM (other people's money).

  • Withdraw While Growing Your Account

Any withdrawals you make from your personal account while trading will diminish the size of your account and hinder its growth over time. For prop trading, however, you can withdraw at any time without affecting the size of your account, allowing it to grow exponentially even if you eventually stop trading.

  • Becoming A Better Trader

Not all prop trading firms have good regulations, and many of them have unrealistic regulations that will simply encourage you to engage in excessive trading and gambling.

The rules must be basic and simple. The guidelines must enable the prop trader to stick to particular risk management criteria to become more consistent with their trading and profitable over the long term, as opposed to making a quick buck only to lose their funded account the following month.


It is a highly competitive position that requires the performance of a person. Invested capital returns are expected to be satisfactory, and meeting such expectations can be difficult. Numerous trading companies do not offer fixed pay. With these companies, there are times when traders may incur losses. Due to automated trading robots and high-frequency trading, proprietary trading has become significantly more difficult (HFT). Timing the market can sometimes be a difficult endeavor.

What Is The Income of Prop Traders?

Prop trading is one of the most profitable businesses undertaken by financial organizations while being widely perceived as dangerous. A predetermined profit-sharing ratio typically defines a prop trader's earnings. The amount earned is entirely dependent on a prop trader's profit, which is determined by commissions, negotiations, profitability, volume, etc. This implies that the potential outcomes are limitless.


Profits from trades are often split between the firm and the prop trader, but the risk is asymmetric. This means that in the event of a loss, you will face 100 percent of the losses, but you will not receive 100 percent of the profits. The majority of corporations retain between 10 and 25% of all profits and give the remainder to the prop trader. You must realize that trading, and particularly day trading, is highly volatile, meaning that you can make millions or lose the same amount.

What Is A Prop Trader's Daily Routine?

The majority of prop traders work in a certain market, and thus they do their trading during this time. Nonetheless, a prop trader needs to be cognizant of global economic developments. They devote a great deal of time to reading such news and monitoring the evolution of other markets. During trading hours, the trader must constantly monitor the price and search for entry and exit chances. Such possibilities can arise in a matter of minutes, and on other days, the trader may not execute any trades.

How to Become A Prop Trader

To trade assets for profit, proprietary traders utilize their financial expertise in hedge funds, stock market circumstances, and investment methods. Bachelor's degrees in finance, business, or mathematics are needed to become a proprietary trader. Complete a minimum of one internship at a trading firm to gain professional knowledge of the finance industry and network. Apply for an entry-level position as a proprietary trader. Examine the benefits, drawbacks, trends, and best practices of trading within investment banks, as the application procedure for traders is frequently competitive.

1. Learn to trade the market

It is ludicrous to believe that anyone can immediately generate a profit. Consequently, everyone would be a prop trader if this were true. Understanding the diverse markets and their drivers is crucial. A prospective prop trader can pick between futures, equities, foreign exchange, and commodities based on his preferences. You should devote a considerable amount of time to monitoring these markets. In addition, it is essential to comprehend the fluctuations caused by technological and macroeconomic factors. One must understand when to enter and when to leave. This is the initial and most important step.

2. Follow the rules

Every market has its own set of regulations that traders must follow. For instance, a prop trader engaging in the U.S. equity markets must be aware of the timeframes. Futures and derivatives contracts would necessitate daily settlement of initial and maintenance margins. Circuit breakers may differ from one stock to the next. Prop traders should not utilize material non–public knowledge, and any such transactions would be considered illegal. Other laws, including the Volcker rule, may apply to traders employed by financial institutions receiving deposits. Each broker has its own rules, such as the maximum position size and daily loss limit, which must not be exceeded.

3. Setup a trading strategy

A prop trader can utilize a number of different indicators, and the trader has several strategies to pick from across all of them. Imagine that an unskilled trader relied solely on the Simple Moving Average (SMA) to execute his trades. Depending on his needs, the prop trader can select 50-period SMA or 100-period SMA from this technical indicator. Noting that no one method can guarantee profitability, it is prudent to enhance a technical indication with other measures. An SMA may signal that a stock is overbought, but if quarterly profits are strong, we could anticipate more share price increases.

4. Practice money and risk management

As previously said, no technical indicator can guarantee 100 percent profitable trades, and historical trends may not accurately predict future prices. Every trader will propose risk management to limit losses. This is especially crucial for prop traders, as their positions typically involve leverage. This means they can open a position worth $100,000 with only $10,000 in the capital. When markets are unfavorable, it is likely that losses will exceed $10,000. Stop-loss orders and hedging are effective risk management techniques.

5. Simulation of Paper Trading

Before trading with a company's capital, prop traders frequently receive a simulator account on a trading platform to demonstrate their proficiency. This is a learning phase for the prop trader and an evaluation of his skills. Most companies will only hire a trader who has performed well in paper transactions. It enables the organization to evaluate the candidate's trading tactics and risk management techniques. It is also a wonderful opportunity for traders to explore the capabilities of the web platform. Numerous brokers offer this service for a nominal fee.

How to Select A Prop Trading Company?

The greatest difficulty for prop traders is typically locating a reliable prop trading firm. As previously stated, there is a substantial chance of being deceived by a corporation posing as a prop trading company. Make sure the company you're dealing with is legitimate and has a solid track record. Check numerous platforms for reviews and testimonials.

You can also run background checks on the management to ensure they have never been involved in scandals or unethical business practices. Ensure that you conduct adequate due diligence and comprehend the risks associated with prop trading.


In conclusion, it is rather easy to become a prop trader. Find a reputable prop trading company that offers a funded trading account and submit an application. During this procedure, you must examine a number of aspects, including the account size, the profit split %, the trading platforms and tools offered by the firm, and the monthly fee charged by the prop firm.

Once you have accomplished this, you can focus only on developing your trading talents with the assistance of the firm's mentors. Due to the difficulty of trading, it may take months or even years to become a consistently profitable prop trader. To become a professional trader and create a career as a trader, gaining access to a funded trading account may be the most accessible method.


Can A Prop Trader Trade in Anything They Want?

The firm often provides prop traders with stringent trading limits and restrictions on the types of trades they may execute.

Is Prop Trading Illegal?

No, prop trading is not illegal, but caution is advised, especially in countries with tight regulations, such as the United States.