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Proprietary trading is a markedly different form of trading in financial markets, particularly compared with traditional trading conducted through brokers. In this article, we’ll explain what proprietary trading is, how it works, and how it compares to modern online trading.
What is Proprietary Trading?
Proprietary trading, also known as prop trading, is a financial firm’s practice of trading forex, bonds, equities, stocks, or any other financial instrument using its own capital, rather than trading on behalf of clients. This allows firms to earn higher profits rather than accumulating smaller commissions and fees from clients’ transactions and trades.
With in-house analysts, complex trading software, and market links, these firms are well-positioned to identify opportunities in financial markets.
Importance of Proprietary Trading
While prop trading focuses on generating profits for the firm, it also makes an essential contribution to the financial markets.
- Liquidity Provision – Prop traders use vast amounts of capital, which adds liquidity to the markets and makes it easier for other participants to execute trades.
- Market Efficiency – Prop traders contribute to market efficiency through strategies like arbitrage.
- Economic Contributions – Due to the scale of prop trades, the profits are substantial. This directly contributes to economic growth through taxes and reinvestment.
How Does Proprietary Trading Work?
Proprietary trading occurs when a firm trades using its own funds to maximise profits. This gives the firm flexibility to trade and the opportunity to retain a larger share of profits. These trades are generally more speculative, with higher risk-to-reward ratios.
In most prop trading firms, high-performing traders are onboarded to execute the trades on behalf of the prop firm, trading the funds provided by the prop firm in return for a share of the profits.
These firms hire seasoned traders through their educational programs, advertising trading roles, or hosting prop trading challenges. These initiatives aim to recruit skilled traders who can help generate substantial profits for the firm. Depending on the results generated by a prop trader, the firms allocate funds in proportion to those results.
However, to avoid losses, stringent policies and rules are in place for both trader evaluation and actual prop trading. These traders must employ efficient stop-loss strategies to comply with established regulations and requirements, ensuring their actions align with the firm’s overall objectives.
Prop Trading Strategies
Prop traders have periodic goals (profit targets) to meet, to be able to share the agreed-upon profit percentages. To achieve these goals, prop traders use several trading strategies, including:
- Arbitrage trading
- High-frequency trading (HFT)
- Expert Advisors (EA)
- Swing trading
- Global macro trading, etc.
- Algorithmic trading
Any trading strategy can be a fair game, as long as 1) the prop trading firm allows it, and 2) adequate risk management is put in place. For example, some prop trading firms prohibit the use of EAs or news trading, particularly when evaluating prospective prop traders’ capabilities.
Please read our article on Prop Trading Strategies to dive deeper into the strategies for prop traders to use.
Financial Instruments Traded
Prop trading firms often allow their prop traders to trade forex, gold, stocks, commodities, and other instruments.
The financial instrument chosen typically depends on the firm’s risk tolerance and the trader’s ability to generate profits. While most traders focus on stocks, metals, and forex, others with higher risk tolerance can use the company’s assets to trade derivatives such as contracts for difference (CFDs) and cryptocurrencies.
Joining a Proprietary Firm
Making prop trading a career can be more achievable than it seems. With the rise in the number of financial firms, the demand for skilled traders has also increased. Many firms now allow traders to operate remotely using the firm’s tools and funded accounts.
Prop firms often look for traders using one of the following methods:
- Interviews
- Evaluations and challenges
- Educational programmes
Becoming a trader through an interview process often involves the firm advertising trading positions on different platforms. Following your submission of a resume, portfolio performance, and educational background, the interviewers typically inquire about your trading strategies. The interviewer will also ask about the markets you specialise in and the analysis techniques with which you are proficient. Once you’re through, you’ll be assigned to a probationary period during which you’ll be evaluated on a low-risk account with a lower balance.
Another way these firms fund traders is through trading challenges. This step evaluates how a trader performs with an account over a given period. Most of these firms’ trading challenges would include parameters such as maximum daily loss, total loss, profit target, and number of trading days. Upon successfully passing the prop trading test or challenge, these traders are offered a position and/or a fully funded account. One example is the Vantage Elite Challenge, where aspiring traders must pass both the Challenge and Evaluation phases to become an Elite Trader.
Internships and educational programs are often overlooked, but they are among the best ways to become a prop trader. These firms selectively recruit talented individuals through their internship programs or their paid educational routes. Candidates typically invest in a trading course, after which they are granted access to a simulated account for practice. Those who demonstrate success in trading may be offered positions within the firm.
Benefits of Proprietary Trading
If you familiarise yourself with the best trading and analysis techniques, there’s a lot to benefit from in the prop trading space. As a seasoned trader, the advantages of proprietary trading outweigh the risks. A few of the upsides are listed below:
- High-income potential – The funded accounts can range from a few hundred thousand to millions of dollars. Given that a trader shares profits with the firm, the earning potential is limitless.
- Learning – Prop traders work with seasoned professionals who have traded for years through both bull and bear markets. With a shared goal, knowledge is often shared, and there’s no limit to what can be learned by working with a firm.
- Working with complex trading tools – Firms have access to complex tools and bots that make the analysis and trading processes much easier. For example, most of these institutions provide access to exclusive indicator tools or signals within the MT4 or MT5.
- Growth opportunities – Continual success with a prop trading firm gives you opportunities to grow within the company by managing a larger account balance, which provides you with the opportunity to gain higher profits potentially. Profit shares can be increased over time, and the allocated risk percentage rises accordingly. This translates to an increase in income over time.
Risks of Proprietary Trading
Working with considerable capital always has its risks, and prop trading is no exception.
- Lack of stability – Prop trading isn’t the most stable career. A few bad trades strip you of the fully funded accounts, and you have to go back to your drawing table.
- Lack of autonomy – While there is some freedom to execute different strategies, most firms have stringent rules on risk management in trading and the number of trades per day. This reduces the potential daily profit you can generate.
- Upfront charges – When starting a prop trading challenge, there is often a one-time fee (or deposit) that traders must pay to participate. While successful traders may not have an issue with this amount, newcomers may find it a financial burden.
- Pressure to achieve targets – If you’re someone who doesn’t perform well under pressure, prop trading isn’t for you. You are expected to meet the set profit targets. Failing to achieve these targets can lead to the firm refusing to pay you for the month, or you could no longer be a prop trader with the firm.
Proprietary Trading vs Hedge Funds
Prop trading firms and hedge funds both trade financial markets to generate profits. So what is the difference between prop trading and hedge funds?
The difference between proprietary trading and hedge funds lies in the party that manages the funds. Hedge funds trade on behalf of clients and make money through commissions and fees. On the other hand, prop firms use their own funds to generate maximum profit.
Proprietary Trading vs Modern Online Trading
Proprietary trading involves providing the firm’s capital to traders, allowing them to share the profits generated for the firm, whereas modern online trading is more individual-focused.
The stakes for online traders are generally low because they aren’t accountable to anyone for their trades. That being said, the key differences between prop trading vs modern online trading are listed in the table below:
| Prop trading | Modern online trading | |
| Capital | Online traders rely on the tools offered by online brokers. Today, these brokers offer a wide range of tools and educational materials. | Online traders use their own funds to trade. Their goal is to make profits that boost their personal portfolio gains. |
| Risk tolerance | Online traders rely on the tools offered by online brokers. Today, these brokers offer a wide range of tools and educational materials. | Risk tolerance varies among individuals. Retail investors rely on personal risk management strategies that are generally less sophisticated. |
| Tools | Prop traders have access to complex tools and indicators, exclusive market data, and advanced trading algorithms. | Online traders rely on the tools offered by online brokers. Nowadays, these brokers have started to offer a wide range of tools and educational materials. |
Introducing the Vantage Elite Challenge
The Vantage Elite Challenge is a funded trading challenge created to evaluate traders’ skills and effectiveness. Participants in this challenge receive up to $200,000 in simulated funds and can earn 80% of the profits upon successful completion.
Additionally, participants who successfully become an Elite Trader will have their registration fees refunded along with their first payout. This underscores Vantage Elite’s commitment to your trading success, not just fees.
When joining the Vantage Elite Challenge, select from two distinct account types—Basic and Plus+, each tailored to different trading preferences and risk tolerance. The journey to becoming an Elite Trader with Vantage Elite is streamlined and user-friendly, starting with a simple account setup.
Once you have selected your preferred account type, proceed to the Challenge and Evaluation Phases. These phases are meticulously designed to cultivate not only your trading skills but also your discipline and risk-management abilities, both of which are crucial for any successful trader. With the promise of no hidden fees and fast, fortnightly payouts, Vantage Elite offers a transparent and reliable platform where your trading skills can truly flourish and lead you to become a Vantage Elite Trader.
Additionally, the Vantage Academy is here to support your growth throughout the challenge. Whether you are a novice or an experienced trader, a comprehensive range of educational resources, from market fundamentals to advanced trading strategies, is available to help you thrive in the competitive trading landscape.
Conclusion
Proprietary trading or “prop trading” refers to the practice of financial firms using their own capital to generate profits. While prop trading offers the potential for high returns, it requires sophisticated risk management to mitigate the inherent risks and ensure market stability.
From a trader’s perspective, prop trading can be a lucrative career as you get to trade with significant funds. If your trades are successful, a chunk of the profit is shared with you. This makes the upside potential unlimited. On the other hand, a few bad days can put you under immense pressure to perform. If you’re a trader confident in your trading and risk management capabilities, prop trading can be a compelling challenge to consider.
FAQs
1. What is the Vantage Elite Challenge?
The Vantage Elite Challenge is a trading challenge that provides traders with up to $200,000 in capital to trade and offers an 80% profit share.
2. What products can I trade in the Vantage Elite Challenge?
In the Vantage Elite Challenge, you have the freedom to trade a wide range of financial instruments. This includes forex and CFDs on indices, commodities, shares, and more, allowing you to leverage diverse market opportunities. Enjoy the flexibility to use any trading strategy and maximise your trading potential across various asset classes.
3. What kind of leverage does a Vantage Elite account offer?
A Vantage Elite account offers leverage that varies by the product being traded. The leverage options are as follows:
- Forex: Up to 100:1
- Gold (XAU): Up to 30:1
- Silver (XAG), Oil, and Indices: Up to 50:1
- US Shares: Up to 10:1
- Cryptocurrencies: Up to 3:1
4. What is the profit payout at the Vantage Elite stage?
In the Vantage Elite Challenge, the profit payout is 80% when you successfully become an Elite Trader. This means you receive 80% of the profits generated from your trading activities, while the remaining 20% goes to Vantage Elite.
5. Is there a minimum period before I can request a payout?
You must become an Elite Trader to request a payout. Once you have reached this stage, payouts are processed fortnightly, with a 3-day processing period for the transaction to be reflected. You need to wait until the next scheduled payout period to request your earnings. This helps ensure a consistent and reliable payout schedule for all participants.
