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    Types of Proprietary Trading Firms

    There are many types of trading firms in the market today, some that work within specific types of industries, some that create specific types of funds, those that are seen as ‘activist investors’ that take a stand through betting against companies or industries they feel are immoral, while there are trading firms that doing just about all of it. 

    Within the industry, there are firms that are proprietary trading firms or firms that actively invest their own capital to profiteer, rather than for the interest of investors or depositors.

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    Proprietary (or prop) trading is a high-risk form of trading where instead of acting on client’s orders and receiving commission payments, the trader assumes their own position with the capital of the firm[1]. Although these prop trading desks within firms or proprietary trading firms can be exposed to greater risks, they can be the most profitable traders within a company.

    These proprietary trading firms provide higher returns than fund managers or other trading desks within an investment bank or trading firm through the fact that the company (or desk) invests the firm’s own money, not that of their investor or deposits.

    Rather than merely charging a ‘fee for service’ or buying or selling at a spread - adding a small margin on the shares the firm sells for a profit – the firm is realising the entire gain or loss of the trade. 

     

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    When exploring the benefit of proprietary trading firms, many of them are looking to leverage the Internet, online trading platforms and the ‘hook’ of working remotely to potential proprietary traders. This can be achieved through online training platforms, assessments and the potential for traders to be given money to manage should they succeed. This type of firm is certainly different in the way that it operates in comparison to traditional fund managers or traders. 

    Rather than filling expensive inner-city offices with traders that require commuting time and the stresses that come with it, these new and innovative proprietary trading firms are promoting work/life balance from anywhere, as long as the traders earn.

    Within a proprietary trading firm, all the risk is assumed by the firm which means the firm is not typically seeking outside investors. The organisation has the capital to trade and this capital is found in the form of the equity owned by its traders and owners of the business, not by going to market with a prospectus or offering such is done when a fund is being raised through a traditional scheme.

    In Australia it must be noted that proprietary trading firms – unlike in the USA – are not trading companies, they are largely small groups through to large investment banks. Meanwhile in the USA, thanks to the wash-up of the GFC in 2008, US financial institutions are banned from conducting prop trading due to the heavy losses they sustained that crashed the global economy.

    Proprietary trading firms take on a lot of risk but have a great deal of reward for the traders and the firms themselves when they get it right. But when they get it wrong, we cans see outcomes like the GFC

    [1] https://www.wallstreetoasis.com/finance-dictionary/what-is-proprietary-trading

    We welcome you to give our team a call to discuss your investment goals and objectives.

    You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.

    Want to read more great information on Proprietary Trading? Check out our Proprietary Trading article: Exploring how Proprietary Trading is different from regular trading