Proprietary trading refers to when a firm, usually a financial institution, trades for its own direct gain instead of earning commission by trading on behalf of its clients. This form of trading is done with the firm’s own money and not that of its clients.
How Proprietary Trading Works
Proprietary trading occurs when a firm or bank invests for direct market gain rather than earning commissions by trading on the behalf of clients. Proprietary traders may use a variety of strategies such as index arbitrage, statistical arbitrage, volatility arbitrage, merger arbitrage, global macro, long/short equity, and relative value arbitrage.
Regulation
Proprietary trading is regulated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in response to the financial crisis of 2007-2008. This regulation aims to prevent banks from making risky trades with depositors’ money.
Controversy
Proprietary trading has been a subject of controversy due to concerns about conflicts of interest, market manipulation, and systemic risk. Critics argue that proprietary trading can lead to excessive risk-taking by banks, which could endanger the stability of the financial system. Proponents, however, argue that proprietary trading provides liquidity to markets and contributes to price discovery.
