Proprietary Trading Explained: Definitions, Strategies and Career Opportunities!

7 min read

By Chainika Thakar

While looking for a suitable job in the proprietary trading firm, there may be certain questions that you might be looking for the answers of. With this article, we aim to cover what proprietary trading means and the role of a trader working in a proprietary trading firm. Alongside, various other essential topics are around the regulations and the uniqueness of proprietary trading.

The article covers:

What is Proprietary Trading?

Proprietary trading simply implies the trading practice by an entity such as a bank or a firm. The investment can be made in stocks, derivatives, bonds, commodities or any other financial asset. Proprietary trading involves the entity's own funding and not the clients’ money. The firm or bank investing the money earns the entire profits and does not have to rely on the commission from clients’ investments.

Next, we will discuss the trading strategies which a proprietary trading firm usually chooses.

Strategies in Proprietary Trading

Traders working in a proprietary trading firm choose from various strategies for making the trades beneficial. The strategies we are going to discuss here are:

  • Merger arbitrage
  • Index arbitrage
  • Global macro-trading
  • Volatility arbitrage

Merger arbitrage

Merger arbitrage, also known as risk arbitrage, is an investment strategy in which the trading company buys the stocks of the merging firms. This strategy aims at taking advantage of the inefficiencies in the market. This can occur as a simultaneous purchasing and selling the stocks of two or more merging companies which help create less risky but profitable opportunities.

Index arbitrage

The index arbitrage strategy aims to make profit from the difference between the actual price of the stock and theoretical future price of the same stock. Such as buying the stock at 1200 today and selling it at 1210 at a date in the future is an index arbitrage opportunity. Hence, the strategy involves buying the lower-priced index and selling the higher-priced index expecting the return of prices to equivalency.

Global macro-trading

The global macro-trading strategy depends on the interpretation of macroeconomic events on a regional, national or global scale. In order to make the implementation of global macro strategy successful, the managers of the portfolio analyse the macroeconomic and geopolitical factors. Such factors include the rate of interest, exchange rates of currencies, political events, international trades as well as international relations. Also, this strategy depends on the systematic risk of the markets on which there is no control of the organisation.

Volatility arbitrage

This strategy aims at gaining profit from the difference in the implied volatility in the options and the corresponding movements in the underlying. Volatility arbitrage is usually executed in a delta neutral portfolio wherein it includes an option and underlying asset. We know that volatility and option prices move in tandem with each other.

Hence, if the trader feels that implied volatility is too low and the underlying asset is anticipated to have a greater volatility momentum in future then the trader can opt for a long call option and execute a short position in the underlying. If the volatility indeed increases in the future, then the value of the option would also increase. If the price of the underlying asset remains largely unchanged then the outcome would be favourable for the trader.

There are also many more sophisticated trading strategies used by seasoned traders and quants. Explore some of these trading techniques in our Advanced Algorithmic Trading Strategies learning track which is developed in collaboration with the leading industry experts.

Let us find out about volcker rule in proprietary trading next.

Volcker Rule on Proprietary Trading

In the U.S, during the Great Recession, several firms and hedge funds were brought under scrutiny. As it was believed that the financial crisis of 2008 was mainly due to the credit defaults, the federal government brought up Volcker rule in order to avoid another crisis from happening.

Volcker rule was a regulation established on proprietary trading in 2010, as a part of the Dodd-Frank Wall Street Reform. This was done to restrict the depository banks from getting into any risky investments where the volatility is higher. This was proposed by Paul Volcker, who was a former federal reserve chairman, mainly to make commercial banking and investment banking separate activities.

Volcker had mainly put forth the decision on the basis of the fact that proprietary trading was affecting the economy as a whole. It was observed that the banks or such entities were getting indulged in making profits instead of taking care of the consumer market. Several banks which had opted for proprietary trading made use of derivatives for minimising the risk. The usage of derivatives led to an increased risk in several other areas.

Hence, with this rule, it was made necessary that banks focussed on keeping their customers happy instead of putting their own profit-making activities above the safety of the customers. In response to the Volcker rule, many banks have either separated their proprietary trading activity from their main operations or have completely shut them down.

There have been many perspectives around these rules and the industry has evolved around it over the last decade since the Volcker rule came into existence.
Further, you will find out how proprietary trading firms differ from hedge funds.

Hedge Fund Vs Proprietary Trading

Although both hedge funds and proprietary trading firms fall under the ambit of the Volcker rule mentioned above, there are certain things that put them apart. Both entities are investors in the financial markets. Let us see what all makes them different from each other.

Hedge Funds

  • Hedge funds mainly invest in the financial markets by using their clients’ funds. These entities are basically paid for generating profits on the investments.
  • Also, hedge funds are accountable to their clients
  • Their profits are not entirely theirs and they take the commission out of the paid investment amount.
  • Hedge funds are entirely in favour of the clients as they invest on their behalf.

Proprietary Trading

  • It invests the entire amount of funds in the financial markets from their own firm’s money.
  • Proprietary trading firms are not accountable to any client.
  • They retain the entire profit generated. It strengthens their own firm’s balance sheet.

Let us move forward and find out about the career a trader in a proprietary trading firm which can help the trader progress in their profession.

Career of a Trader at a Proprietary Trading Firm

In many cases, a trader working at a proprietary trading firm is a contractor to the firm and not an employee. He/she needs to manage financial assets such as stocks, currencies, options contracts, futures etc. on major global exchanges. The trader in the proprietary trading firm is neither a financial adviser nor a stockbroker and the main focus of the trader is on the immediate trading trends. There are several important interview questions which you can explore in our quant interview preparations course.

Undoubtedly, the educational requirements and skills of a trader are the basic foundations for starting the career as a trader in a proprietary trading firm. Here we will find out briefly on these two topics:

Educational requirements

A trader usually holds at least a bachelor’s degree in a field related to finance such as mathematics, statistics, economics, banking, or business. There are training or mentorship programs offered by various firms which hire a trader in case he/she is new to the field.

Skills of a trader working for a proprietary trading firm

A trader mainly needs to be skilled with self-motivation for planning and initiating trades on behalf of the employees. Other skills are:

  • A strong written as well as verbal communication skills so as to be able to put forth their investment strategies
  • Good knowledge of trading and analytical skills
  • Fast-paced and a quick decision-maker for market changes
  • Team player attitude as they are to be working with other traders as well as brokers
  • Passion for trading and the convincing determined attitude
  • Sharp mathematical skills for scalping, arbitraging and day trading
  • Experience in implementing several trading strategies such as momentum, scalping etc
  • Knowledge of various methodologies for forecasting price movements and executing trading strategies
  • Extensive knowledge of financial markets and asset management skills
  • Risk management and money management skills
  • Market-research oriented attitude which includes independent market research on a daily basis for planning trading strategies

A general hierarchy in a proprietary trading firm goes as follows:

  • Junior trader
  • Senior trader
  • Partner in the trading firm

Usually, you will start from the junior trader level in case you are an undergraduate. Apart from a trader, there are some other job opportunities one can seek at a proprietary trading firm such as:

  • Quant Researcher - Establishing mathematical models for trading algorithms and strategies.
  • Developer - Implementing the researchers’ models or strategies and creating algorithms for helping the traders trade algorithmically.
  • Data Scientist - Help to devise trading strategies for the firm.

Moving forward, let us take a look at the pros and cons of being a proprietary trading.

Pros and Cons of Proprietary Trading

For a trader, there are a number of benefits of working at a proprietary trading firm. But, it is not all beneficial and, hence, there are some downsides to the role. Let us find out both pros and cons for you further.


As a trader in a proprietary trading firm, you will find yourself working amidst the following advantages:

  • You have access to more trading capital while working in a proprietary trading firm as compared to working on your own
  • In case you are a beginner, you will find yourself receiving training from professional day traders and access to such training is quite beneficial for your future
  • The firms are quite professional when it comes to making payment to you for your efforts.
  • The work of a trader at a proprietary trading firm may interest you a lot if you have quantitative skills since these firms require the same


Although not everything is rosy when you work at a proprietary trading firm. Hence, there are these cons you must be aware of:

  • Several firms have made their operations online since it is more beneficial monetarily as compared to having a brick-and-mortar business. So, if you need a physical space to share with other experienced traders, it may be a bit of a tricky situation for you
  • Some initial capital is required from the trader by some proprietary trading firms to act as a risk buffer and also for accessing their platform
  • One must be aware of the scams or the firms which promise you payments but end up not paying you anything


A proprietary trading firm is basically an entity which invests its own money in a particular financial instrument or combination of financial instruments. One can work in a proprietary trading firm with some knowledge about trading practice, a good educational background and some skills. Also, it is important to be aware of the cons along with the pros of proprietary trading.

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