Proprietary trading occurs when a company risks their own capital to trade stocks, currencies, commodities or other financial instruments for financial gain. This is different than hedge funds or investment firms that trade on behalf of their clients and make money through commission, profit sharing and fees.
Most proprietary trading occurs at big banks and trading firms who strictly use their own capital and reap the rewards of their successful trading strategies or endure the losses from coming up short.
There are a ton of different strategies these firms implement that range from global macro strategies, arbitrage or even based on fundamental analysis.
Most of these firms have major resource advantages that they can use to make more informed trading decisions giving them a major edge over retail traders.
Being A ‘Prop’ Trader
If you want access to more buying power, powerful resources and competitive commission structures then you can look at becoming a prop trader, but there is a big obstacles you have to get through first. One of the biggest steps in becoming a prop trader and having access to a firm’s trading capital is you must pass either the Series 7 or Series 56 test.
Since these firms are heavily regulated, you are required by the SEC to pass these tests before being able to participate in proprietary trading activities and in order to take the test you have to be sponsored by the firm you are looking to work for.
The licenses cover general market knowledge, best practices and compliance rules. The Series 7 is usually one of the first tests investment professionals take and if your license is active then you will be waived from having to take the Series 56.
Some proprietary firms require you to put up your own capital as kind of an insurance deposit. This can be as low as $5,000 or even lower, but with this capital contribution you have access to a lot of buying power not obtainable as a retail trader with some firms giving you 30 to 1 buying power and even more if you prove yourself as a successful trader.
However, with access to this kind of trading capital there will usually be administrative fees you will have to pay each month and the firm will also take a cut of the profits.
Proprietary trading isn’t for everyone and requires you to be comfortable with the uncertainty of not receiving a steady paycheck and the possibility of you losing your trading capital.
However, if are making consistent money but need more buying power to take your trading game to the next level then it may be advantageous to look at trading through a ‘prop’ firm.