Proprietary Trading

Proprietary trading occurs when a bank or some other financial institution trades with the firm’s own funds rather than trading on behalf of its clients, to earn profits for itself. Firms or financial institutions use the organization’s own capital to conduct financial transactions in various instruments, often for speculative purposes.

The main advantage of proprietary trading is that proprietary trading allows an institution to realize 100% of the gains earned from an investment, hence in the balance sheet of the company they are represented under investments. On the other hand, when financial institutions trade on behalf of clients, they earn revenue in the form of fees and commission, which is generally a small percentage of the total amount invested or the gains generated, and are shown in the income statements of the company under commissions earned.