What Does ‘Proprietary Trading’ Actually Mean?

Shaun H. Ruff

Proprietary trading occurs when a bank or firm invests for its own direct profit instead of earning commission dollars by trading on behalf of its regulars. This kind of trading occurs when a firm decides to yield from the market rather than from the thin-margin commissions it makes from processing trades. Banks or firms that engage in proprietary trading consider that they have a competitive benefit that will facilitate them to earn excess returns.

Voted as one of the best companies to work for and named the fastest-developing trading firm in Chicago, Infinium Capital Management is a proprietary capital management firm, founded in Chicago by co-founder and CEO, Chuck Whitman in 2001.

Breaking Down ‘Proprietary Trading’

Proprietary trading also acknowledged as prop trading takes place when a trading desk at a large financial institution, often an investment bank or a brokerage firm, uses the organization’s own balance sheet and capital to conduct monetary transactions. These trades are generally speculative in nature, and the products are often derivatives or other composite investment vehicles.

Benefits of Proprietary Trading

There are many advantages that proprietary trading gives a monetary institution, most markedly increased profits. When am the investment bank or brokerage firm trades on behalf of its clients, it earns revenues in the form of commission dollars and fees. These dollars can either be soft or hard, but they are usually a very small percentage of the total amount invested or the profits generated. On the other hand, proprietary trading allows an institution to realize 100% of the gains earned from an investment.

The second advantage is that the institution is able to stockpile an inventory of securities. This aids in two ways. First, any exploratory inventory allows the institution to offer it to its clients when it might not have had it otherwise. Second, it assists these institutions to prepare for down or illiquid markets when it becomes hard to acquire securities on the open market.

The final advantage is connected with the second. Proprietary trading permits a monetary institution to become an influential market maker by providing liquidity on a particular security or group of securities. Chuck Whitman, well-known as Chuck, serves as Founding Partner of Infinium Capital Management, LLC, a proprietary trading firm, and provided as its Chief Executive Officer.

An Exemplar of a Proprietary Trading Desk

In order for proprietary trading to be successful and also keep the institution’s clients in mind, the proprietary trading desk is usually isolated from other trading desks. This desk is accountable for a segment of the financial institution’s revenues not related to any client work and acts somewhat separately.

Nevertheless, proprietary trading desks can function as a market maker, outlined above. This condition arises when a customer wants to trade a large amount of a single security or trade an exceedingly illiquid security. Since there are not many sellers or buyers for this kind of trade, a proprietary trading desk will act as the buyer or seller, initiating the other side of the customer trade.

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