| 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