Interest in proprietary trading as a method of investing has been getting increased attention in recent years. If you query Google Trends to gauge search interest for “prop trading,” you will see that the number of people doing online research on this topic has almost doubled since 2020. While this may seem like a financial trend, prop trading dates back to the 1970s, and it continues to attract investors whose profit strategies are driven by innovation.
How Prop Firms Help You Execute Innovative Trading Strategies
As previously mentioned, proprietary trading has been around for a few decades, but it came of age during the turn of the century and at the height of the Dot-Com Bubble era of Wall Street. The explosion of prop trading was influenced by the period of great financial prosperity that emerged from the ashes of Black Monday in 1987.
The advent of the internet heralded the era of web-based day trading, increasing widespread interest among tech-savvy investors who stay active on the markets. A new generation of traders emerged, and their market education allowed them to discover proprietary trading.
Prop trading houses began seeking individual investors around the year 2000. Thanks to new regulatory frameworks and the overall development in banking and investing, it was easier for prop trading entrepreneurs to set up new ventures. At the same time, the general interest in day trading acted as a matchmaker between firms and individual traders.
The business model has not changed; a prop shop still trades financial instruments using its own money, but the modern approach has become more sophisticated. Proprietary trading can be conducted across a variety of markets, including stocks, bonds, commodities, and currencies. In recent years, forex prop firms have been leading this financial segment, and this trend has a lot to do with trading innovation.
To a certain extent, joining a modern prop trading firm is similar to getting a job at the trading desk of an investment banking firm. As a prop trader, you take positions on the market from a professional perspective, which is what you would do at the trading desk of Wall Street firms such as Goldman Sachs.
Unlike day trading, you are not investing your funds; the prop firm puts up the capital, although some business arrangements may involve pooling capital. You get to tap into the expertise and resources of experienced prop traders who also professionally approach the market.
Prop Trading: A Lucrative Way to Invest for the Future
Being funded by a prop firm takes your trading to a different level. Many traders who grow frustrated with their retail brokers’ exorbitant leverage, excessive fees, and abusive margin trading terms are often surprised it took them so long to discover prop trading.
For example, if you are a forex trader, you probably know the feeling of looking at your transaction record and seeing all the pips your broker made from your trades. Even when the market turns against you and triggers a margin call, your broker still profits from your misfortune. This is not the case with prop shops; your profit potential increases significantly with prop trading because fees and commissions are not fleecing you.
How Prop Firms Are Using Innovation to Beat the Market
Proprietary trading moves at the speed of Wall Street. Prop shops are constantly innovating for profit; to this effect, they only operate with advanced trading software that helps them identify trading opportunities and manage their risk. The market analytics packages used by prop traders make it easier to identify trends and patterns in the market.
Some firms are using source-grounded artificial intelligence to scan for fundamental analysis factors that may derail trades; for example, if you enter a long forex buy EUR/USD position, you don’t want to get blindsided by a surprise announcement by the European Central Bank about an interest rate hike, and this is the kind of analysis and monitoring your trades enjoy at prop shops.
Conclusion
Prop firms can provide you with the resources and support you need to innovate your trading strategy. As the market evolves, prop firms will likely play an even more important role in offering day traders a professional trading environment complete with funding.
