What is a Proprietary Trader?

A proprietary trader is someone who makes trades on behalf of the institution she or he works for. Firms which engage in proprietary trading opt to operate in the market directly to make money, rather than retaining clients, trading on their behalf, and accepting a commission based on performance. The legal position of proprietary traders varies around the world, depending on the market, as different governments regulate financial activities differently.

The practice of proprietary trading is utilized by a wide variety of financial institutions. The logic behind it is that when it is done properly, large amounts of money can be made for the parent institution, and the profit margin is bigger than it is when executing trades for clients. This can be used to bolster available capital, which can be used to do everything from lending money to bank customers to increasing the size of company profits.

The terms on which a proprietary trader works vary, depending on the firm. The trader is usually paid a commission which reflects performance on the floor. This acts as an incentive to make smart investment decisions which will earn money for the parent company. However, it can also encourage traders to make risks because they want to increase their profits and they are spending money which belongs to someone else, which can sometimes cultivate a less conservative approach to investment.

Traders with an established performance record and demonstrable skills may be offered more favorable contract terms than new traders. Trading is an industry in which people traditionally work their way through the ranks and this holds true for a proprietary trader as well. Many people start by playing a mock stock market, imagining that they have made investment decisions and seeing how they pay out, while obtaining certifications which allow them to work as traders. People are often started out with small deals and tasks, and are gradually given more responsibility as they demonstrate that they are able to handle it.

Someone who works as a proprietary trader uses a variety of skills. This type of work requires the ability to remain standing for long hours, to communicate clearly, and to work in environments which may be hot, crowded, and intense. The ability to deal with high levels of stress is critical for a proprietary trader as is the ability to make split second decisions, to stick with them, and follow them through. Hesitation can translate to big losses on the trading floor.