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Proprietary trading, commonly called prop trading, is when a financial institution, trading firm, or individual trades financial instruments using its own capital rather than on behalf of clients. The profits and losses belong entirely to the firm. There are no client accounts to manage, no fiduciary duties to outside investors, and no client commissions. The firm puts its own money to work and keeps whatever it makes or absorbs whatever it loses.
Think of it as the difference between a casino running a poker room for customers versus the casino playing the games itself.
Proprietary trading happens across a wide range of institutions with very different approaches.
Before the Volcker Rule took effect in 2014, major investment banks including Goldman Sachs, Morgan Stanley, and JPMorgan ran large proprietary trading operations alongside their client businesses. The Volcker Rule, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, prohibited banks insured by the Federal Deposit Insurance Corporation from engaging in most forms of proprietary trading. Banks responded by spinning out or closing many of their prop trading operations.
Dedicated proprietary trading firms stepped in to fill the space. Jane Street Capital, Citadel Securities, and Virtu Financial are among the largest, running systematic and high-frequency strategies across equities, fixed income, currencies, and derivatives. These firms are not banks and are not subject to the Volcker Rule.
Proprietary traders use virtually every strategy available to the financial markets.
The Volcker Rule introduced one of the most complex regulatory regimes in U.S. financial history. The definition of proprietary trading under the rule, and the exemptions for market making, hedging, and underwriting, have generated thousands of pages of guidance, interpretive letters, and enforcement actions since implementation.
The rule contains an exemption for market making because banks still need to facilitate client transactions by holding inventory. Regulators examine whether a bank's inventory holdings reflect genuine market-making activity, with positions turning over rapidly in response to client demand, or whether they represent directional proprietary exposure dressed up as market making.
At the other end of the scale, hundreds of boutique proprietary trading firms hire traders and provide them with firm capital, splitting profits. These firms exist outside the banking system and are not subject to the Volcker Rule. Many specialize in a single asset class or strategy, trading equities, futures, or foreign exchange with tight risk controls and technology infrastructure built specifically for their approach.
With deep roots in traditional finance and the digital asset industry, Acquire.Fi operates as a specialist M&A advisory firm. Coverage spans M&A, secondaries, OTC, and capital markets advisory across digital assets and frontier tech. Our team has decades of combined experience across every stage of the deal lifecycle.
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