Proprietary trading strategies are technical trading algorithms used for a variety of arbitrage and risk strategies. Proprietary trading is done for the benefit of the trading company only and not for the benefit of any client. Proprietary trading usually involves large capital outlays and high volume stock trading. Proprietary trading is performed mainly by hedge funds and investment banks, notably Goldman Sachs. Proprietary trading is distinct and different from most investment activities because there is no brokerage activity or client relationship involved. Proprietary trading has become an important source of income for the firms that undertake such activity.

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Important Proprietary Trading Strategies

Most proprietary trading involves arbitrage. Index arbitrage, statistical arbitrage, merger arbitrage and volatility arbitrage are all popular forms of trading. Groups of dedicated traders, separate from traders and salespeople dedicated to filling institutional orders, oversee trading activity. Because of the diminished use of ‘open outcry’ (trading on the NYSE floor through shouted-out orders rather than through computer matching of orders), arbitrage is done directly from institutional computers to computer-order placement on the exchange floor.

Potential Issues in Proprietary Trading Strategies

The Choice of Instruments When Proprietary Trading

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