What is proprietary trading?
This is when a financial institution makes trades for its own gain rather than on behalf of its clients. It happens when a company decides to try and make money directly from the markets, rather than the commission it can make from processing trades on behalf of others.
Where have you heard of proprietary trading?
You might have heard of it being referred to as prop trading. In 2013, financial regulators in the US tried to ban propriety trading under the Volcker Rule as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. After long delays, the rule was implemented in 2015.
What you need to know about proprietary trading.
Proprietary trades are usually speculative in nature. They may be carried out with normal bonds and shares traded on exchanges, but more often involve derivatives and other complex investment products. The main benefit of this type of trading for financial institutions is that is allows them to keep 100% of the gains they earn from an investment. When the firm invests on behalf of its clients, it earns money from fees and comissions which are usually only a very small proportion of the total amount invested or the profits made.
Find out more about proprietary trading.
Proprietary trading is often seen as risky, because it results in more volatile profits. Find out more about what this means.