Proprietary forex trading is a financial operation where a company uses its own money, rather than that of investors, to convert currency or speculate on a foreign currency market. This is a primary way for brokerage houses and investment banks to generate large amounts of income for the company as a whole, rather than an individual investor. Proprietary forex trading is preferred for these types of institutions since the profit or loss may be realized very quickly, and the systems inherent in the sales give preference to places with large sums of liquid money.
From a financial standpoint, proprietary forex trading sits right at the intersection of two major financial concepts: proprietary trading and foreign market trading. In order to understand the concept as a whole, it is necessary to understand the underlying ideas. In most circumstances, each of these processes is completely independent of one another.
Proprietary trading is performed directly by companies that specialize in the investment of other people’s money. Commonly, banks or brokers are the largest proprietary traders, but other groups such as standard corporations or non-profit organizations may be involved if the situations are correct. A proprietary trade is made using money that belongs to the organization rather than an investor. This is often a very gray area, as the majority of the cash-on-hand in the system actually comes from invested companies.
This is a potently risky endeavor for everyone involved, as a large loss could result is problems if the investment company needs to pay out to investors. This may result in insolvency for the institution or even a total collapse. As a result, it isn’t uncommon for investment houses to keep their proprietary trading practices from their investors.
Forex trading involves trading foreign currencies on the open market. This is supposedly done to allow companies to purchase large amounts of foreign money on paper and then pay foreign investors or suppliers directly without currency conversion. In reality, it is often used as a speculative investment arena that provides high payoff for high risks.
The process of proprietary forex trading is the joining of these two ideas; a company trades its own money on the foreign money market. Since discrepancies in currency change very quickly, sales need to be instant to maximize the profit made from the transaction. Since proprietary traders have a lot of liquid assets, they can make trades with no clearance time.
Proprietary forex trading is generally extremely lucrative, but has a very high risk factor. As a result, several countries have taken steps to regulate or prevent the practice with varying degrees of success. It is often in the government’s best interest to limit these practices, as the taxpayers usually end up covering loses made through bad investments.