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Proprietary trading

Practice of trading financial instruments using a firm's own money From Wikipedia, the free encyclopedia

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Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using customer funds) to make a profit for itself.[1]

Proprietary traders may use a variety of strategies such as index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, or global macro trading, much like a hedge fund.[2]

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Retail proprietary trading

Since the 2010s, proprietary trading has also become accessible to retail traders through firms that offer so-called evaluation programs. In this model, individuals can access company capital after passing a test phase under strict risk management rules, such as maximum daily losses, maximum drawdowns, or restrictions on overnight positions. Profits generated are shared between the trader and the firm, while the firm earns revenue through profit splits and fees related to the evaluation process. This model is commonly referred to as a retail prop firm.[3]

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Regulation

Following the 2008 financial crisis, some jurisdictions introduced restrictions on proprietary trading by banks. In the United States, the Volcker Rule limits deposit-taking institutions from engaging in certain types of prop trading. Independent proprietary trading firms, which do not take customer deposits, are generally not subject to these prohibitions.[4]

Famous traders

Trader Nick Leeson took down Barings Bank with unauthorized proprietary positions. UBS trader Kweku Adoboli lost $2.3 billion of the bank's money and was convicted for his actions.[5][6]

Armin S, a German private trader, sued BNP Paribas for 152m EUR because they sold to him structured products for 108 EUR each which were worth 54,000 EUR.[7]

Notable proprietary trading firms

See also

References

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