Proprietary Trading (Prop Trading)

Proprietary trading, or prop trading, involves financial institutions trading stocks, bonds, currencies, commodities, or other financial instruments using their own capital, rather than trading on behalf of clients. The goal is to generate profits from the bank’s market positions. Prop trading can be highly profitable but also involves significant risks, as losses directly impact the institution’s capital. Traders use a range of strategies, such as arbitrage, technical analysis, and high-frequency trading.

Example

A bank engages in proprietary trading by using its capital to buy and sell stocks, aiming to profit from short-term price movements in the market.