Technology is changing, and so does the finance and trading industry. fintechview sat down with Themis Christou, Group CMO at The Trading Pit, to discuss the new trend in the online trading and investing industry, given a handful of small brokers are breaking the norm by introducing proprietary technology and proprietary trading business model.
What is Proprietary Trading, and what traders does it attract?
Proprietary trading (prop trading) is when firm profits from market activities rather than the margin commissions obtained through client trading activities. Prop trading may involve CFDs, stocks, bonds, currencies, derivatives or other instruments.
Prop traders may employ trading strategies that include index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, technical analysis, and global macro trading. Traders use the firm’s accounts and capital to place trades in various financial instruments to generate a profit for the firm, which can be shared with the trader as a profit split.
Proprietary Trading Firms Vs. Retail Trading Brokers: What are the key differences?
The difference between prop trading firms and retail trading brokers is best explained by first defining both.
Retail Trading Broker: This is when an individual buys and sells financial assets using their finances operating through the broker’s trading platforms. As a retail trader, you are responsible for providing the funds, marketing yourself and placing the trades. So, if something goes wrong, you are liable to risk.
Proprietary Trading Firm: A prop trading firm may use various trading strategies, such as day trading, swing trading, and algorithmic trading. Prop trading firms trade with their capital, focus on making profits for the firm, and provide a profit split between the trader and the firm.
Funds: As a retail trader, you are responsible for providing the funds and placing the trades. If something goes wrong, you could lose all of your investment. As a prop trader, you’ll work in a structured, professional environment with a wide range of support. Prop traders also typically trade using funds and accounts provided by the prop firm they are part of.
Profits: As a retail trader, you will take 100% of the profits from your trades. But you also face all of the risks. As a prop trader, there will be a profit split between the trader and the firm.
What are the benefits of Proprietary Trading?
First of all Proprietary trading providers flexibility. The Prop traders can trade financial instruments and markets, including stocks, bonds, futures, options, currencies, and commodities. It allows them to take advantage of it and diversify their trading strategies. Alignment of incentives, is another important benefit, because prop traders are trading with the firm’s capital, their incentives are the firm’s motivations. Furthermore, it can lead to a more collaborative and productive trading environment, as traders are motivated to generate profits for the firm. Prop trading firms typically employ experienced traders with a withstanding of financial markets and the skills necessary to make profitable trades. This trading expertise can help the firm generate consistent returns over time.
Last but not least, risk management. Prop trading firms typically have robust risk management systems
(Evaluations) in place and control risk exposure. Therefore, this helps to protect the firm’s capital and prevent significant losses and at the same time traders have high earning potential to make significant profits through their trading activities, which can be a substantial incentive for those interested in a career in finance.
The result is that trader interest is protected, and traders receive cutting-edge support to make informed trading decisions. Plus, traders keep a high percentage of the profits, while the broker provides the live accounts and capital to trade on.
How do you see the future of this business model?
The future of prop trading (proprietary trading) will continue evolving, as it is influenced by various factors such as technological advancements, regulatory changes, and market conditions.
One trend in recent years is the increased use of technology in prop trading, particularly algorithmic and high-frequency trading techniques. This situation has allowed firms to analyse large amounts of data and execute trades more quickly and efficiently. However, this has also led to increased competition and regulatory scrutiny, with some arguing that high-frequency trading can lead to market instability.
Another trend observed is the increasing focus on risk management and compliance in prop trading. In response to the financial crisis of 2008, increased regulatory oversight and a greater emphasis on preventing excessive risk-taking. As a result, prop trading firms have had to invest in risk management systems and compliance infrastructure to meet the new regulations.
In addition, the new development with the EU Market Abuse Regulation (MAR) and Mifid 2 regulations enforce a large amount of transparency for Proprietary Trading activities, making it harder for non compliant firms to operate.
In general, the future of prop trading is likely to be shaped by a combination of these and other factors, and firms that can adapt to changing conditions and navigate the regulatory landscape will be more successful in the long term.
Overall, with the increased competition and regulatory scrutiny, the future of prop trading will become more challenging. However, this also means that firms that can navigate these challenges will have a greater chance of success.
Who is Who
Themis is the Group CMO at The Trading Pit, a newly launched proprietary trading firm. Themis has extensive experience in delivering long-term brand growth within the fintech industry. Helped drive the development of several prominent companies, most notably Tickmill, M4Markets and Orbex and the London Barbican Centre, London City Hall, where he worked for the Mayor of London. Specialises in building clean, reputable brands from the ground up and is an expert in marketing and development for start-ups and new-born brands, with over 12 years of experience in managerial positions in building quality brands and magnifying brand equity in the fintech and forex industry.
