Proprietary Trading
When a financial firm trades securities using its own capital to generate direct profit, not for clients.
What is Proprietary Trading?
Proprietary trading (prop trading) occurs when a bank or financial firm uses its own capital to trade stocks, bonds, derivatives, currencies, or commodities with the goal of generating direct profit for the institution rather than earning commissions or fees on behalf of clients. Proprietary trading desks historically delivered significant profits for large investment banks, but also created conflicts of interest and contributed to excessive risk-taking before the 2008 financial crisis. The Dodd-Frank Wall Street Reform Act introduced the Volcker Rule in 2010, which significantly restricts proprietary trading at federally insured banks and their affiliates. Independent proprietary trading firms and hedge funds operate without these restrictions, and standalone prop trading shops remain common in futures, foreign exchange, and equity markets.
Example
Before the Volcker Rule, Goldman Sachs operated large proprietary trading desks that bet the firm's own capital on commodity prices and credit derivatives, generating billions in annual profits during favorable years. Post-Dodd-Frank, such activity at deposit-taking banks was largely restricted to market-making and hedging activities.
Source: Federal Reserve — Volcker Rule