Prop Trading: The Essence, Characteristics, and Reasons for Its Growing Popularity
Date: 2025-10-01 Author: Gabriel Deangelo Categories: BUSINESS
The primary goal of financial market participants is to generate income. Companies with capital are interested in investing, but often lack the necessary expertise or time. Traders, on the other hand, are skilled in market analysis and execution, but are limited in resources. Prop trading solves this problem: the organization provides the funds, and the trader uses them for trading, receiving a share of the profits. Thus, both parties fill in the gaps and achieve a common goal: profit.
The scheme is based on a partnership between the company and the trader. Financial transactions are carried out using the organization's capital and on its behalf, while trading is conducted by an invited specialist. Remuneration is usually calculated as a percentage of the profits generated. For example, Kraken offers traders up to 90% of the profits from successful trades. These specialists don't have a fixed salary in the traditional sense.
The company determines the trading rules: instrument selection, trade volume, and strategy. However, the company bears the risk of losses. In some cases, some liability may be transferred to the trader, depending on the terms of the contract. To minimize risks, prop companies have their own risk management departments, and traders' actions are limited by internal regulations.
The main difference lies in the source of capital. Proprietary trading uses the company's own funds, while trust management uses clients' funds. This gives prop companies more freedom and allows them to act more proactively. Client asset managers, on the other hand, are required to exercise caution and act as conservatively as possible.
Nevertheless, there are also many similarities: both models are based on asset trading, both require the participation of professional traders, and both require a risk management system.
There are several key factors explaining the growing interest of companies in this model.
First, capital diversification. Large organizations seek to protect their assets from inflation and preserve their value, making trading in financial markets an attractive solution.
Secondly, there's freedom of action. Using its own funds, the company determines its own strategy and selects the markets in which to trade.
Thirdly, there's legality. Despite government requirements for KYC, AML, and mandatory risk control, the model is completely legal. Proprietary trading is particularly developed in the United States, where there are clear rules for conducting such business.
Proprietary trading is a form of professional asset trading using company funds, attracting traders to implement investment strategies. Its popularity stems from the opportunity to diversify capital, flexibility in decision-making, and legal status. All of this makes prop trading one of the key instruments in the modern financial market.
