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Proprietary Trading Examples

Proprietary Trading Examples

Proprietary trading has been around for years. It confers to one the sole proprietary rights to benefit from a specific trading strategy. Investment banks trade and invest
for their clients and earn commissions and fees.

Then, they thought for a second, and said: how about trading with our own money and keep all the profit instead of only earning commissions and fees from clients? That was it.

Today, both investment and retail banks have their own proprietary trading desks. Not only are banks earning fees and commissions from their clients trading accounts, they use their own money and proprietary trading tools to cream the financial markets on daily basis.

Though an investment bank can lose enormous amount of money, the urge to make more profit trading with their own money supersedes that fear.  The time has come to abandon a conservative investment banking approach, and
take a different cap that offers unlimited risks and rewards.

The push for more profit from the investment banking has led to the creation of various proprietary trading tools, strategies and software.

Proprietary Trading Desks

An investment bank can have many proprietary trading desks in house where each desk specializes in a specific instrument. For example, a proprietary desk for currencies or
indices or commodities or ETF or stocks or derivatives. A desk that is fully funded by the bank (not the clients' money) with the aim to trade a specific financial instrument or instruments.

Traders who work for the bank sit at that desk. They are experts in trading the designated financial instrument. There is a ceiling to how much money they play with in the financial markets, and are rewarded apart from their basic salaries with commissions that are related to how much profit they have made for their bank.

So the more money a desk makes, the higher is the cut of profit that will be share by those traders for their higher performance. It is fair and straightforward. Only jealous people will question why an agile trader should take home so much profit. On the other side, those traders come under unbearable pressure when things go tips up.

Some of those traders even commit suicide, lose their job or reputation altogether. Call it the Ying and Yang of the proprietary trading.

Understand that the investment bank in this instance, is not trading with his clients money, but its own money (or depositors' money) and create the proprietary trading desk. Traders that are working at a desk are the bank's employees. 

The bank develops its own trading software or strategies that help to maximize profit and minimize the risks without going bust or begging the central banks for the tax payers' bailout money.

There are hundreds of combination proprietary trading desks that an investment bank can create. The sky is the only limit.

Day Trading Proprietary Desk

Years ago, brokers dislike traders who are actively scalping trade the financial markets. They see them like
scroungers or parasites. Most day traders are seen as doomed market participants that are not going anywhere.

However, that has changed since the banks can now borrow money for free (0% interest rate) from the central banks.
So here is an investment bank with a lot of excess money that it does not know what to do with it. After many
sleepless nights, the bank like many others create a day trading proprietary desk. Note that, we are talking about
day trading, that also involves scalping trades on the lower time frames at a faster rate.

Investment banks recruit reputable day traders that are actively day trading with the banks' money, and making
profit or losses in real times in the financial markets. Those traders are under a tremendous pressure to deliver
more profit day after day. They are quickly sacked if their performance falls beneath the standards. This is no joke

The bottom line is always how much money a day trader has make for the bank at the end of the day.
That is it. No nonsense. Take it or leave. Beside the pressure, a competent day trader who is making consistent
profit for his investment bank can also earn two or three times his basic salary just in commissions from profitable trades.
Again the functions of each desk is determined by what the bank intents to do with that proprietary day trading desk.

Swing And Position Proprietary Trading Desk

Those are medium term desks contrary to the short term desks of day trading or scalping.

Again the bank is using its own fund at its own risk in view to profit in the financial markets in the medium term.  Understand that the medium term here means any period from three days
to one up to three years.  Professional swing and position traders manage those desks like eagles and do their best to reduce losses and risks and gradually increase the profit. 

They put their reputation and career on the line, and buy and sell in the financial markets according to the rules assign to their desk.   A proprietary desk will have its own team, leader and supervisor that will make sure that the team does not break the rules or go too wild.  In all cases, it all about making more money with the bank's money within the rules.

Long Term Proprietary Trading Desk

Apart from the last two proprietary desks, the long term desk is about taking long term positions of four to ten years.  Both technical and fundamental traders sit at that desk.  They will agree on a viable trading or investment strategy that works.  

Though, it seems like the pressure is lesser in this case, the reality is different.  The long term proprietary desk, believe it or not usually causes more losses to the investment banks than any other desk.

Suppose that a long term desk has taken a multi-million-dollar position in silver because of their in-depth due diligence.
Initially everything was smooth and rosy.  They keep adding to their positions until one day, they realized that they must close those gigantic bullish positions before it is too late.  A long term proprietary trading desk is often forced to take heavy losses due to the unexpected changes in the financial markets. 

Usually, those positions are not close straightaway because of their seize.  Initially, defensive measures are deployed to safely protect the positions.  There are also worries that other competitors may know about the issues, and initiate contrarians positions that will force the desk to take losses.

The long term proprietary desks are traditional trading desks because most investment banks  that dare to risk their own 
money often hold financial instruments for long term purposes.  However, due to the advanced of trading technologies and software, banks begin to adopt a short term investment or trading approaches that are highly speculative.

Instant HFT Proprietary Trading Desk

After the 2008 financial crisis and fall of the gigantic Lehman Brothers global financial firm, investment banks proprietary
traders have been vilified and sacked.  The banks do no longer have stronger balance sheets, and need more help more
than ever before from the central banks such as the Federal Reserve, ECB, Bank of England and Japan. 

For those reasons, the traditional proprietary trading desks are replaced by trading software or algorithmic trading tools.  Human beings are no longer needed because they make too many mistakes.  They are forgetful, lazy, costly, sleepy and slow in contrast to the trading computers.  Due to those reasons, a new proprietary trading desk has been created.  The new desk is the HFT proprietary trading desk.  

HFT stands for High Frequency Trading.  We are talking about nano second, a split of second, far less than a minute
financial markets transaction that is executed by a computer at the fastest speed ever seen in the financial markets.

Apart from those unprecedented fast trades, the number of trades have exponentially increased.  All are done by trading
algorithms and few human beings that sit in from of those computers.  There are no more recurrent salaries to pay to 
hundreds of employees.  As long as the HFT is funded on a robust market principle. 

This is the new age of HFT proprietary trading firms 
that has completely changed the game of proprietary trading.  As more profit are made by the traditional investment banks,
retail banking sector also joins the race of the fast money making proprietary high frequency trading desk.

Yes, they are using their own money because why should one only rely on fees and commissions at a time when it is possible to make real millions of dollars in one hour at the push of button on a trading computer. 

Welcome to the wild wild west of the proprietary trading,  Those desks can be highly lucrative but also speculative to point of wiping out a bank balance sheet if not in steady hands.


Traditional proprietary trading was about trading with banks own money instead of relying only on clients fees and commissions.  Today the map of the proprietary trading has dramatically changed.  The risk-reward ratio of a proprietary
trading desk has exponentially increased.  

Though, some banks have made vast amount of profit, others have lost their shirt.

Nevertheless, the proprietary trading is here to stay.  The game will never be the same again because of the new proprietary trading tools that are deployed in the financial markets.  After all, one question remains.  Should a retail banking player plays with its depositories' money in the financial markets just because of greed? 

How much money should those proprietary trading firms expose to risks?  Finally, should the tax payers bail out private banks that are using in-house proprietary tools?  Others also wonder if an individual or retail trader should build his or her own proprietary trading strategy?

Well, this is the end of this article of the proprietary trading.  I will be back soon exploring other aspects of the proprietary
trading.  Please stay tuned and be ready for more.  I hope this article has opened your understanding of the different types of proprietary tradings.  If that is real, feel free to share this article on the social medial.  Thank you for visiting today.

This article is written by George Beaulieu