What is Proprietary Trading?
In its simplest definition, Proprietary Trading activities are financial transactions undertaken by an organisation using and risking its own capital. The organisation, Proprietary or ‘prop’ firm, will generate profits by way of assuming risk rather than by generating commission fees from customers. Proprietary Trading firms do not have clients, do not sell or broker deals and products, but survive and prosper through a thorough understanding of risk and money management. As a consequence of their activities, proprietary traders generally provide liquidity to the market and a risk transfer mechanism for other market participants.
In order to illustrate, let’s consider a light-hearted example; you introduce the owner of an orchard to somebody who wished to buy apples. If a price was agreed between the parties, the transaction occurred, and you were paid a percentage of the sale price, you’d be a broker or an investment banker.
But imagine if we had studied consumption patterns of fruit, and researched weather patterns and then concluded that the fair value of apples should be $5 per kg. If we then could buy apples at $4.50 per kg, and tried to resell the apples at $5 per kg, this would be considered to be Proprietary Trading. We have risked our own capital to take a position in apples, which hopefully we would make some money from. Congratulations! You are now a Prop Trader.
There are myriad trading styles under the ‘prop’ umbrella, using many different asset types. Here at Aliom Trading we focus primarily on spread trading opportunities in global futures markets. We develop our Traders to be adept at trading across multiple strategies, across multiple exchanges and in multiple timeframes.
You can find out more about how you could become a Proprietary Trader for Aliom Trading here