Proprietary Trading

Proprietary trading — commonly abbreviated as prop trading — is when a financial firm trades stocks, bonds, options, futures, currencies, and other instruments using its own capital rather than managing money on behalf of clients. The firm keeps all the profits (and absorbs all the losses) from its trading activities.

This stands in contrast to two other business models in finance:

• Hedge funds: Manage outside investors' capital and charge management fees (typically 2% of assets) plus performance fees (typically 20% of profits). Hedge fund managers have fiduciary duties to their investors.
• Investment banks: Historically had prop trading desks that traded the bank's capital alongside client-facing businesses. The Volcker Rule (part of the 2010 Dodd-Frank Act) largely banned bank prop trading to reduce systemic risk.

Standalone prop trading firms — like Jane Street, Optiver, SIG (Susquehanna), Hudson River Trading, and Jump Trading — are unaffected by the Volcker Rule because they don't take deposits or operate as banks. They exist solely to trade profitably with their own money.

Prop trading firms vary in structure, but most share these characteristics:

• Partnership or private ownership: Most prop firms are privately held by their founders and senior traders. There are no outside investors to answer to, which allows for faster decision-making and long-term thinking.
• Technology-driven: Successful prop firms invest heavily in technology — co-located servers, low-latency networks, custom trading platforms, and data infrastructure. Technology is a competitive moat.
• Profit = compensation pool: Since there are no management fees, all revenue comes from trading profits. These profits fund salaries, bonuses, and reinvestment in technology and talent. In a bad year, profits (and bonuses) drop; in a great year, they can be enormous.
• Flat hierarchies: Compared to banks and large hedge funds, prop firms tend to have flatter organizational structures. Junior traders can have significant impact quickly.

The most common strategies at prop trading firms include:

• Market making — providing liquidity and earning the bid-ask spread
• High-frequency trading — ultra-fast automated strategies
• Options trading — pricing and trading options using quantitative models
• Statistical arbitrage — exploiting pricing relationships between securities

The difference between prop firms and hedge funds matters significantly for career decisions:

• Capital source: Prop firms trade their own money; hedge funds trade investors' money. This means prop firms have no investor relations, no fundraising, and no redemption risk.
• Compensation structure: Prop firms pay salaries + discretionary bonuses from trading profits. Hedge funds pay base salary + a share of the performance fee. At the entry level, prop firms typically pay more ($300K-$450K vs. $200K-$350K). At the senior level, hedge fund portfolio managers can earn more because they receive a percentage of profits on large capital bases.
• Strategy horizon: Prop firms tend to run shorter-term strategies (seconds to days) that require less capital. Hedge funds often hold positions for weeks to months, requiring more patient capital.
• Regulation: Prop firms face lighter regulatory burdens than hedge funds (which must register with the SEC and comply with investor protection rules).
• Culture: Prop firms often have a more collaborative, team-oriented culture (especially Jane Street and SIG). Many hedge funds operate a "pod" model where individual portfolio managers run independent strategies.

For new graduates, prop firms are often the better entry point: higher starting pay, more training, and exposure to live markets from day one.

The leading prop trading firms in 2026 include:

• Jane Street: The largest ETF market maker globally. Known for its collaborative culture and intellectual rigor. Trades ETFs, bonds, options, and crypto. Based in New York with offices in London and Hong Kong. Starting comp: ~$400K.
• Citadel Securities: Handles ~25% of all U.S. equity volume. The market-making arm of Ken Griffin's Citadel empire. Based in Miami/Chicago. Starting comp: ~$350K-$400K.
• Optiver: Dutch options market maker with a strong presence in Amsterdam, Chicago, and Sydney. Known for fast-paced trading and competitive culture. Starting comp: ~$350K.
• SIG (Susquehanna): One of the largest options trading firms globally. Based outside Philadelphia. Famous for teaching traders poker and game theory. Starting comp: ~$300K-$350K.
• Hudson River Trading (HRT): Technology-focused firm with a strong engineering culture. Primarily algorithmic and HFT strategies. Based in New York. Starting comp: ~$350K-$400K.
• Jump Trading: Chicago-based firm strong in futures, crypto, and HFT. Known for its technology investments including microwave networks.