What is the definition of Proprietary or Prop?
- Posted on November 21, 2019
- Financial Terms
- By admin admin
Proprietary (or prop) trading is a high-risk form of trading where instead of acting on clients orders and receiving commission payments, the trader assumes his own position with the capital of the firm. This means they will experience the full profit or loss of the position. Prop trading firms trade electronically and the traders can use the leverage of the firm to magnify returns (and losses).
Prop trading has been responsible for some large losses and there is a risk of moral hazard (the trader is using the firm's capital and therefore may take more risks) but is also usually the most profitable part of an investment bank. Prop traders usually have access to extremely sophisticated software and information to enable them to gain a competitive edge. Under the Dodd-Frank legislation and Volcker Rule, prop trading is being made more and more difficult to do and is now only allowed by 'important' firms for hedging purposes.
Prop trading has been responsible for some large losses and there is a risk of moral hazard (the trader is using the firm's capital and therefore may take more risks) but is also usually the most profitable part of an investment bank. Prop traders usually have access to extremely sophisticated software and information to enable them to gain a competitive edge. Under the Dodd-Frank legislation and Volcker Rule, prop trading is being made more and more difficult to do and is now only allowed by 'important' firms for hedging purposes.
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