The Key Difference Between Proprietary Trading and Client-Based Trading

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Feature Proprietary Trading Client-Based Trading
Definition Trading done by a financial firm or bank using its own capital to earn profits. Trading executed by brokers or firms on behalf of clients, managing client funds.
Capital Used Firm’s own capital or funds. Clients’ capital or funds entrusted to the firm.
Objective Maximize profits for the firm from market activities. Serve clients’ investment goals and execute their orders.
Risk Exposure Firm assumes all risk of gains or losses. Clients bear risk; firm acts as agent or advisor.
Revenue Source Profits or losses from trading positions. Commissions, fees, advisory charges, and spreads.
Trading Strategy Highly aggressive, speculative, or arbitrage-focused. Follows clients’ instructions or portfolio mandates.
Regulation Subject to stricter regulatory oversight and capital requirements. Regulated mainly for client protection and compliance.
Transparency Less transparent to public; internal firm operations. Transparent to clients regarding their trades and holdings.
Conflict of Interest Potential conflicts if firm trades against client interests. Focus on fiduciary duty and client best interest.
Examples Hedge funds, investment banks trading desks, proprietary desks in brokerage firms. Retail brokers, wealth management firms, asset managers.
Technology Use Uses advanced algorithms, high-frequency trading, and quant models. Uses order management systems and client portfolio platforms.
Holding Period Can be very short-term (seconds to days) or longer depending on strategy. Varies based on client goals from short to long-term.
Market Impact May influence market liquidity and prices significantly. Client trades generally smaller and dispersed.
Profit Distribution Profits belong solely to the firm. Clients earn profits or losses on their own accounts.
Decision Making Firm’s proprietary traders make all decisions. Clients or their advisors decide trades; firm executes.
Leverage Usage High leverage often employed to maximize returns. Depends on client mandate and regulatory limits.
Fee Structure Profit from trading gains; no direct fees to clients. Commission, management fees, advisory fees charged to clients.
Compliance Must adhere to proprietary trading regulations (e.g., Volcker Rule). Must comply with client protection laws and fiduciary standards.
Purpose Increase firm’s capital and profitability through trading. Help clients grow or preserve their wealth per their objectives.
Risk Management Firm manages risk internally with sophisticated systems. Risk managed on client accounts with diversification and limits.
Proprietary Trading vs Client-Based Trading
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