Proprietary Trading Desk Setup: A Step by Step Guide

6 min read

By Chainika Thakar

Proprietary trading is one of the most popular trading businesses. Many wish to know what proprietary trading firms are and what they do, likewise there are many who build and setup their own proprietary trading desk. That is the reason we have segregated this article into various sections explaining the meaning, initial steps and the further steps as well. Let us find out below exactly how.

This article covers:

What do you mean by a proprietary trading firm?

Proprietary trading implies an individual, a group, a bank, a financial institution etc. trading with their own funds rather than trading on behalf of its clients, to earn profits for itself. Firms or financial institutions use the organization’s own capital to conduct financial transactions in various instruments, such as stocks, commodities, etc.

What are the benefits of being a proprietary trader?

Most of the investment banks have their own proprietary trading desks and so do many firms, financial institutions, banks, etc. Proprietary trading firms benefit in the following ways:

  • 100% returns come to the proprietary trader
  • A Proprietary trading firm can stock an inventory of securities for future
  • Market making is possible

100% returns come to the proprietary trader

The main advantage of proprietary trading is that proprietary trading allows an institution to realise 100% of the returns earned from an investment, hence in the balance sheet of the company they are represented under investments.

On the other hand, when financial institutions trade on behalf of clients, they earn revenue in the form of fees and commission, which is generally a small percentage of the total amount invested or the gains generated. These earnings (from trading on clients’ behalf) are shown in the income statements of the company under commissions earned.

A Proprietary trading firm can stock an inventory of securities for future

Stocking the inventory of securities for the future is another huge advantage of proprietary trading. Since the proprietary traders use their own fund’s capital, they can stock the securities for selling them to their clients (of banks or financial institutions) later. Also, the securities can be loaned out to clients who wish to sell short.

Market making is possible

A proprietary trading firm provides liquidity to the market since it buys the securities and sells to investors at a future date.

When the interested investors buy those securities from the proprietary trading firm at a higher price than what the firm had paid for purchasing the securities, then only there is a profit to the firm. Hence, this way the liquidity gets infused in the market which is the main aim of market making strategy.

Prerequisites to setup a Proprietary Trading Desk

Educational requirements

To set up a proprietary trading firm, you need the knowledge in:

  • Finance/Economics since proprietary trading firms are nothing but financial markets’ trading firms and hence, education or a sound knowledge in finance/economics is essential.
  • Mathematics because the concepts of mathematics help to use statistical tools for historical market data analysis in trading. Historical market data analysis is quite imperative for predicting the market and for deciding the entry and exit positions.
  • Business knowledge is also essential for proprietary trading since at the end of the day it is a business of trading in the financial markets.

Internship experiences

Having knowledge or education in financial trading related subjects is a great first step towards becoming a successful proprietary trader but that is not enough. Theoretical knowledge does not provide the necessary practical knowledge.

When you step into the financial market and begin trading, you get to know the actual challenges and finding the solutions with the right trading strategy is what makes you better.

Hence, becoming an intern with a trading firm can lead to drastic knowledge enhancement about historical market data analysis, strategy creation, backtesting and live execution of trading strategies.

For both a student and a non-student beginner in the trading domain, learning algorithmic trading is optional. Although, the world has almost completely shifted to algorithmic trading including Wall Street.

Common steps for setting up a Proprietary Trading Desk


Once you are ready to begin setting up your proprietary desk, the first step is to register your firm/entity as a company or Limited Liability Company (LLC), Limited Liability Partnership (LLP), a partnership and even as an individual or proprietor. There are different formalities that you will be required to adhere to when registering the firm/entity.

Market access

Market access is nothing but finding your way to the financial markets in order to fetch the historical market data for data analysis as well as to execute the trade orders. In simple words, you need market access for entering and exiting the market to take favourable positions.

There are two ways to get market access and these are:

  • Own membership
  • Broker account

Own membership - Having your own membership in the financial market such as NSE or National Stock Exchange (for India) is beneficial. The benefits include having faster access, keeping the secrecy or the safety of order flow (for example, trading strategy) that can be sold otherwise by a broker plus there is capital efficiency with your own membership. Moreover, you can gain brokerage income from your clients with the membership. Although, there are certain things to arrange with your own membership such as compliance, capital for incurring costs etc.

Broker account - Having a brokerage account will undoubtedly not give you the benefits that your own membership gives. Still, there are certain advantages if you deal with the brokers that are well regulated and they are keeping the accounts segregated. Also, the broker’s background checks must be done properly. Brokers help you with all the compliance and you do not need to incur much cost either. Hence, your entire trading business remains in the broker's hands.

Arrange the capital

Since proprietary trading implies trading with your own money instead of with the raised money, you need to arrange the required capital for trading. It is as simple and as challenging as that!

Since you can not raise the capital unlike hedge funds, you will have to dig into your own pocket.

Get the essentials

Okay, now that you have the capital arranged, you will need to also invest in getting all the necessary equipment, knowledge, infrastructure etc. for your proprietary trading firm.

In case of manual trading, you mainly need a monitor for regular monitoring of markets. Whereas, for setting up an algorithmic trading desk, apart from a sound knowledge in algorithmic trading, you will need infrastructure, platform, risk management practice, backtesting etc.

Regulation and compliance

Coming to regulation and compliance, it varies across geographies and trading destinations. Some of the exchanges need the trading system to pass through the conformance process, while some may need every automated strategy to be empanelled or approved.

Almost all the exchanges provide a test environment where you can develop and test your systems and strategies. As a member of the exchange, you would also need to comply with various statutory guidelines along with various mandatory audits as your respective regulator and/or the exchanges may prescribe.

Most of the regulated exchanges will also ask you to maintain audit logs, trade logs and incident monitors (to monitor crashes etc.). In most global exchanges, the trading members need to save the transaction logs for anywhere between 4 to 8 years, depending on the geography or jurisdiction.

Risk management

Risk management is the identification, assessment, and mitigation of risks. This will be followed by a coordinated and economical application of resources to minimize the impact of unfortunate events or to maximize the realization of opportunities. A risk management system (RMS) is installed within an algorithmic trading platform to manage and mitigate the risks of data access, consistency and quality of data, network protocols, and scalability factors.

Begin trading!

Yes, now you can begin trading using your very own Proprietary Trading Desk. All the best!


Proprietary trading is beneficial and simultaneously involves different levels of costs depending on the steps such as the educational background (initial steps), market access, capital arrangement (advanced steps) etc. This blog explored all the prospects essential to understanding how one can create and setup their very own Proprietary Trading Desk.

We have covered the basics, initial steps and the steps for setting up a Proprietary Trading Desk, leading to beginning the trading process.

You too can get work towards building your knowledge base by choosing courses that will help you get started with Algorithmic Trading, and then proceed to develop and evolve yourself to gain an edge in your trading.

Disclaimer: All investments and trading in the stock market involve risk. Any decision to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.

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