What is Proprietary Trading (plus Strategies for 2022)

Trading in the financial market is one of the most rewarding things you can do. Indeed, today, millions of people are doing it around the world.

Also, as the Coronavirus pandemic continues, it has become the main cash cow for most large banks like JP Morgan and Goldman Sachs. In this report, we will look at proprietary trading, what it is, and how to start, and the main benefits over retail trading.

What is proprietary trading?

Retail trading, which is a popular trading approach, involves opening an account with an online broker and executing your trades. On the other hand, proprietary trading, also known as prop trading, is a strategy that involves to trade with a company’s money.

Why proprietary trading? Because the traders need to incorporate the funding company’s strategies to execute trades and minimise risks.

There are many firms that offer proprietary trading services. However, Day Trade the World (DTTW) is among the pioneers in the industry, one of the largest and is recognized as one of the best prop trading firms (even the WSJ talked about us).

The firm lets individuals from across the world trade with its money. It also allows them to maximise their returns by hiring traders and establishing their specialised trading floors.

How does proprietary trading firms work?

Prop trading starts when a trader gets in touch with a company, in this case DTTW. The trader will be introduced to the industry and then be coached about the company’s processes and its proprietary trading approach.

If the trader is interested, they will receive a trading software and hardware. Our software is known as PPRO8 while the hardware is the CubeX. After this, you will be introduced to day trading, using the TMS training platform as a demo account.

After all this, the company will give you an account with its money and you can start trading. You will get to keep a substantial amount of the money you generate. This amount differs from company to company.

To get a better idea of ​​this, take a look at our partners' day trading profits.

Ideally, you should select a prop trading firm that offers adequate training, has an easy-to-use trading platform, and one that has a long track-record in the industry.

Benefits of proprietary trading

There are several benefits that come in joining a proprietary trading firm.

Professional Training

First, the company behind the service will offer you adequate training about trading. Indeed, most people who start prop trading usually don’t have any experience about the industry before.

Buying Power

Second, money is a major challenge for most people who are interested in trading. A key benefit with prop trading is that the company will give you the funds you need to trade. You will only be required to pay a small refundable amount for your trading hardware.

Methodolody and Mentors

Third, unlike retail trading, prop trading involves following certain easy-to-follow trading methodology. This can help you avoid make mistakes.

Fourth, depending on the prop trading firm that you decide to use, you will always have access to the experienced traders who will guide you through the process.This is because it is in the company's interest to make its traders profitable.

Easily start your business

Finally, with prop trading, it is relatively easy to start your trading floor. This is a very difficult thing to do when you are a retail trader.

» Related: Retail Trading vs Proprietary Trading Accounts

Proprietary trading vs hedge fund

For starters, a hedge fund is a company where the manager raises money from investors and then invests or trades for them. They use their strategies to achieve these returns. In return, the fund manager keeps a certain percentage of the profits and also charges an annual management fee.

Hedge fund managers are some of the wealthiest people in the United States. They include people like Ray Dalio, Bill Ackman, and David Einhorn.

Key differences

Prop trading is different from hedge funds for three main reasons.

  1. With prop trading, you don’t have a set of investors. Instead, you only trade with a company’s funds.
  2. In hedge funds, you need to have a background in the industry. As mentioned above, you don’t need to have an experience in this to start a prop trader.
  3. With hedge funds, you need to periodically write letters and interact with your investors. This is not the case in prop trading.

3 Proprietary Trading Strategies You Should Know

#1. Volatility Arbitrage

In proprietary trading, traders who engage in Volatility Arbitrage are guessing on the changes that will happen to the value of an asset rather than what the price will be. When these changes occur, a difference will exist between the option’s guessed price and the asset’s actual market price.

How to Use it in Proprietary Trading?

In prop trading, such options are part of a portfolio that is neutral. Traders who buy these options are known as holding a long-volatility position. Those selling are said to hold a short-volatility position.

A long-volatility position is betting that the asset’s future volatility will be more than when the trade was made. Short-volatility position is betting that the future volatility will be less. These trades feature put call parity. It is not important if the options traded are puts or calls.

But some traders believe that Volatility Arbitrage is risk-free. This is not true!!

These trades rely on guessing.

The way that the asset’s implied volatility will follow in the future. There is always the possibility of a “black swan” event. Or an event that is a complete surprise and affects the value of the option.

This can be true even with portfolio-based approaches that are made to mix risks.

Maximize returns when Trading the Market Volatility

#2. Merger Arbitrage

Risk arbitrage is a hedge-fund which uses the stocks of two companies that are merging (here some tips to trade a Corporate Merger). Stocks in each company are bought and sold at the same time in an effort to guard against risks.

The main risk is that the merger will not close at all or it will be delayed. Traders who are involved with proprietary trading companies use this strategy a lot. This risk means that the target company’s stock sells for less than the stock in the merged company will sell for once the merger closes.

Traders expect that the difference between the two prices will provide them with a profit.

How to maximize returns with a statistical arbitrage strategy

#3. Global Macro

In prop trading, traders use the Global Macro strategy to get results. They analyze information about economic conditions around the world. This way they can make an “educated guess" regarding the effect it will have on prices. Using this requires analyzing many factors in the market:

  • Emerging economies
  • Global trade imbalances
  • The strength of various currencies

Managers working in global macro differ from regular managers since they rely less on general beliefs in the stock positions. There are many prop trading jobs available for you to get started, and salary can range in different countries.

How to Trade the Emerging Markets Profitably

Final thoughts

Proprietary trading is an excellent starting career for anyone interested in finance or in the financial market. When using a good firm, you will have the ability to trade a wide range of assets such as:

  • stocks
  • currencies
  • commodities
  • exchange-traded funds

All this without risking a substantial amount of your money.

In the past, we have seen people who started with nothing and moved on to start trading offices with millions of dollars in profits!

External Useful Resources

  • Day Trading Jobs With Proprietary Trading Firms - TheBalance
  • What is a proprietary trading firm and what is its function? - Quora

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Leave a comment

George Killian

1 year ago

I’ve interviewed a few prop trading firms and I watch a Canadian office livestream on YouTube every single day when I trade, would love to see what you have to offer and get licensed/set up a trading account

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