What Is Prop Trading? Proprietary Trading, Institutional Desks, Regulation, and the Retail Era

Prop trading, short for proprietary trading, is when a financial firm trades its own capital to make a direct profit rather than executing trades for clients and earning commission. It is practised by investment banks, hedge funds, high-frequency market makers, and commodity houses, and since 2015 by retail prop firms that fund individual traders.

Proprietary trading is one of those terms that means two quite different things depending on who says it. To someone at Goldman Sachs in 2006, it meant a desk inside the bank trading the bank's own book. To a retail trader in 2026, it usually means paying a fee to a prop trading company for a funded account. Both are proprietary trading. They sit at opposite ends of the same idea.

In 19 years around these markets I have watched that shift happen, and the history matters more than most explanations admit. The reason retail prop firms exist at all is that regulation pushed proprietary trading out of the banks after 2008, and technology then made it possible to distribute the model to anyone with an internet connection. This guide covers what prop trading is, how it works, who actually does it, the regulatory turning point that reshaped it, and how the institutional and retail versions differ.

If you are specifically researching retail funded-trader programmes, our guide to what a prop firm is covers that side in full detail. This page is about the practice itself.

What Is Proprietary Trading?

Proprietary trading is the practice of a firm trading financial instruments with its own capital to earn a direct profit, rather than trading on behalf of clients for a fee or commission. The firm carries the full market risk and keeps the full return. The word "proprietary" simply means the money belongs to the firm.

The distinction is about whose money is at risk and where the revenue comes from. A broker executes your order and earns a commission whether you win or lose; its revenue is transaction-based. A proprietary trading desk takes a position with the firm's own capital and earns only if that position is profitable; its revenue is performance-based.

That difference changes everything about how the business behaves. Client-facing businesses want volume. Proprietary businesses want edge. A prop desk will happily trade less if the opportunities are poor, because activity without an edge is just cost. This is also why prop firms obsess over risk limits: with no client fees cushioning the downside, a bad book is a direct loss to the firm.

Proprietary trading covers a wide span of instruments and strategies: equities, bonds, currencies, commodities, futures, and derivatives, traded through arbitrage, market making, volatility strategies, macro positioning, and short-term technical approaches.

How Does Proprietary Trading Work?

In prop trading, the firm allocates capital to a trader or desk, sets strict risk limits, and lets them trade a defined mandate. Profits belong to the firm, which pays the trader through a salary and bonus or a profit share. Risk management sits above the trader, with position limits and loss limits enforced independently.

The mechanics are consistent whether the desk sits inside a bank or the trader sits at home:

1. Capital allocation. The firm assigns an amount of capital and a mandate: which instruments, which strategies, which markets.
2. Risk limits. Position size caps, maximum loss limits, and exposure rules are set before any trade. These are enforced by a risk function that is deliberately separate from the trader.
3. Execution. The trader runs their strategy inside those limits.
4. Profit distribution. At institutions, traders receive a base salary plus a performance bonus. At retail prop firms, traders receive a percentage split of the profits and no salary.
5. Review and scaling. Consistent performers get more capital. Underperformers lose their allocation.

The constant across every version of prop trading is that the risk framework outranks the trader. That principle is what retail funded-account rules are copied from, which is why they can feel unforgiving. They are a simplified version of an institutional risk desk.

Who Does Proprietary Trading?

Proprietary trading is practised by four main groups: investment banks (heavily restricted since 2010), hedge funds trading their own and investor capital, high-frequency trading firms and market makers such as Citadel Securities, Jane Street, and Jump Trading, and commodity trading houses like Glencore, Vitol, and Trafigura. Retail prop firms are a fifth, newer category.

The industry breaks down like this:

• Investment banks. Historically the largest prop traders, running enormous in-house books. Heavily curtailed in the US after 2010, though prop-like activity continues in market-making and treasury functions.
• Hedge funds. Trade investor capital, but frequently deploy partner capital alongside it. The line between asset management and proprietary trading blurs here.
• High-frequency trading firms and market makers. The purest modern form. Citadel Securities, Jane Street, Jump Trading, DRW, and Hudson River Trading trade exclusively their own capital, largely on latency and market-making edges.
• Commodity trading houses. Glencore, Vitol, and Trafigura trade physical commodities and derivatives on their own book, combining logistics with proprietary positioning.
• Retail prop firms. Since 2015, firms that fund individual traders through paid evaluations. Different in scale and structure, same underlying principle.

The first four hire credentialed specialists, often quantitative graduates, and pay salaries plus bonuses. The fifth is open to anyone who can pass an evaluation. That accessibility is the entire reason the term "prop trading" has changed meaning for most people.

From Bank Desks to the Volcker Rule: A Short History

Proprietary trading was dominated by investment bank desks until the 2008 financial crisis exposed the risk they carried. The 2010 Dodd-Frank Act introduced the Volcker Rule, restricting US deposit-taking banks from proprietary trading with depositor funds. Banks closed or spun off their desks, and the talent moved to independent firms.

The sequence is worth knowing because it explains the shape of the industry today.

Before 2008, banks like Goldman Sachs, Lehman Brothers, and Bear Stearns ran substantial proprietary books alongside their client businesses. Those positions were profitable in good years and catastrophic in bad ones, and the crisis made clear that institutions holding insured deposits were taking speculative risk with them.

Dodd-Frank followed in 2010, and with it the Volcker Rule, named after former Federal Reserve chairman Paul Volcker. It restricted banks with federally insured deposits from short-term proprietary trading for their own account. Banks responded by closing prop desks or spinning them out.

The traders did not disappear. They moved to independent firms with no deposit base and therefore no Volcker constraint: Citadel Securities, Jane Street, Jump Trading, DRW, Hudson River Trading. Proprietary trading did not shrink after 2010. It relocated.

The retail chapter opened in 2015, when a small Czech firm called FTMO launched a paid evaluation model: pass a rules-based test, receive a funded account, split the profits. That template spread quickly and defines the retail segment today.

Institutional vs Retail Proprietary Trading

Institutional prop trading employs credentialed traders on salary plus bonus to trade very large firm capital. Retail prop trading gives individual traders access to smaller simulated or allocated capital after they pass a paid evaluation, paying them a profit split with no salary. The principle is identical; the scale, access, and compensation are not.

The honest comparison: institutional prop trading pays better at the top and is vastly harder to enter. Retail prop trading is open to anyone, caps your downside at a modest fee, and gives you capital you could not otherwise raise, in exchange for strict rules and no salary.

For how the retail model works in practice, including evaluations, drawdown rules, and payouts, see what a prop firm is and our guide to the funded trading account.

Proprietary Trading vs Day Trading

Proprietary trading describes whose capital is at risk; day trading describes a holding period. A prop trader trades a firm's capital and may hold positions for seconds or months. A day trader closes positions within the session and may be using their own money or a firm's. The two overlap but answer different questions.

People conflate these constantly. They are not alternatives:

• Prop trading is about capital ownership. The defining feature is that the money belongs to the firm.
• Day trading is about time horizon. The defining feature is that positions close before the session ends.

You can be both at once. A funded trader running intraday strategies on a prop firm account is a day-trading prop trader. A macro desk at a commodity house holding positions for months is prop trading but not day trading. If you are choosing a style rather than a capital source, our guide to short term trading is the more useful read.

How Do Proprietary Trading Firms Make Money?

Institutional prop firms make money from trading profits: spreads captured through market making, arbitrage, and directional positions taken with their own capital. Retail prop firms have a second revenue line, evaluation fees paid by traders attempting challenges, alongside their retained share of profitable traders' gains.

The two models are worth separating clearly, because they create different incentives.

An institutional firm earns only when its traders and systems generate returns. Every dollar of revenue is a trading dollar, which is why these firms invest so heavily in technology, execution speed, and risk control.

A retail prop firm has two streams: the evaluation fees paid by everyone who attempts a challenge, and the firm's share of the profits made by those who pass. The full mechanics are in our guide to how prop firms make money. Because most participants do not pass, fees are a significant revenue line. That is not inherently a problem, but it does mean incentives vary. A firm that profits mainly from failed evaluations behaves differently from one built around funding traders who succeed and stay. Transparent rules, verifiable payouts, and a real scaling path are the signals worth checking, and our guide to whether prop firms are legit sets out how to check them.

Is Proprietary Trading Profitable?

Proprietary trading is profitable for the firms that do it well and for a minority of individual traders. At institutions, top desks generate substantial returns but employ highly selected specialists. In retail prop trading, industry estimates suggest only a single-digit percentage of participants reach a payout, with risk-rule breaches, not weak strategies, causing most failures.

The realistic picture on the retail side: most people who buy an evaluation do not pass, and of those who pass, many lose the funded account within months. That is evidence that trading to strict rules under pressure is difficult, rather than evidence the model is rigged. The traders who succeed tend to share the same habits, small risk per trade, a tested strategy, and complete respect for the drawdown limit. Our breakdown of why most traders fail prop challenges covers the pattern, and our guide to risk management in trading covers the fix.

How to Start Proprietary Trading

To start proprietary trading at an institution you need a quantitative degree, competitive recruitment, and usually prior experience. To start in retail prop trading you need a tested strategy and an evaluation fee: choose a firm, pass its challenge within the risk rules, and receive a funded account with a profit split.

The institutional path is a career track: relevant degree, internships, and a competitive hiring process at firms that recruit narrowly.

The retail path is open now. You pick a firm whose rules fit your strategy (our guide to which prop firm to choose covers the criteria), pay a one-time evaluation fee, hit a profit target without breaching the risk limits, and get funded. The full process, including identity verification and the choice between evaluation and instant funding, is in our guide on how to get a funded trading account.

One honest caveat: the retail route rewards traders who already have an edge. It multiplies existing skill; it does not create it. Build consistency on a small or demo account first, then use a funded account to scale what already works.

Trade Firm Capital With Pipcy

Proprietary trading used to be reachable only through a bank desk or a quant hiring pipeline. The retail model changed that, and the practical question now is which firm's rules you can trade inside. Pipcy runs evaluations with no daily drawdown, no trailing drawdown, news trading allowed, payout requests processed within 48 hours of approval, and a profit split that scales to 100%: Pipcy Classic for percentage-based multi-asset trading, and Pips Mastery for pip-based forex. Both include free Pipcy Academy access.

Frequently Asked Questions

What is proprietary trading in simple terms?

Proprietary trading is when a firm trades with its own money to make a profit, instead of trading for clients and earning a commission. The firm takes the full risk and keeps the full return. It is practised by investment banks, hedge funds, market makers, commodity houses, and, since 2015, retail prop firms that fund individual traders.

Is prop trading the same as a prop firm?

Not quite. Prop trading is the activity, trading a firm's own capital. A prop firm is a company that does it, and in retail usage specifically a company that funds individual traders through paid evaluations. Prop trading is the practice; a prop firm is one type of business built around that practice.

Is proprietary trading legal?

Yes, proprietary trading is legal. It is restricted rather than banned in specific cases: the Volcker Rule under the 2010 Dodd-Frank Act limits US deposit-taking banks from short-term proprietary trading with their own account. Independent firms, hedge funds, market makers, and retail prop firms operate legally, subject to the regulations of their jurisdiction.

What is the difference between prop trading and day trading?

Prop trading describes whose capital is at risk, the firm's rather than the trader's. Day trading describes a holding period, positions opened and closed within the same session. They are not alternatives, and they overlap: a funded trader running intraday strategies is doing both at once.

How much do proprietary traders make?

Institutional prop traders typically earn a base salary plus a performance bonus, with substantial variation by firm and desk. Retail funded traders earn only a profit split, commonly 70% to 95% of what they generate, with no salary. Realistic retail earnings vary widely, and most participants never reach a payout, so treat published income claims cautiously.

Can anyone become a proprietary trader?

Anyone can attempt retail proprietary trading, since prop firm evaluations are open to the public and require only a fee. Institutional proprietary trading is far more restricted, generally requiring a quantitative background and a competitive hiring process. Attempting a retail evaluation is realistic; succeeding still demands a tested strategy and strict risk discipline.

Written by Vladimir Rybakov, Head of PIPCY Academy, CFTe-certified with 19 years of trading experience.

Fact-checked by Snir Ahiel, former co-founder of The5ers and risk management specialist at Pipcy, with 15+ years trading Forex, Stocks, and Options.

Risk disclosure: Trading involves substantial risk. Pipcy provides simulated trading evaluations for educational and assessment purposes. Simulated performance does not represent real trading results, and becoming a funded trader is not guaranteed. Nothing here is financial or investment advice.