The History of Prop Trading and Its Development Around the World
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The world of trading is always filled with evolution and change. In recent years, one of the phenomena that has most captured the attention of retail traders is proprietary trading, or as we more often call it, prop trading.
You may often hear about prop firms and the opportunity to obtain large capital without having to spend personal money. This phenomenon feels very modern, but did you know that the practice of prop trading has existed for a long time and has a long history intertwined with the development of global financial markets?
As an analyst, I believe that understanding its roots is key to understanding its future prospects. In this in-depth article, we will carefully trace The History of Prop Trading and Its Development Around the World, from the exclusive halls of Wall Street to the monitors of independent traders worldwide.
Let's begin this historical journey.
The Beginning of Institutional Prop Trading: The 20th Century
The term proprietary trading literally means trading using the company's own funds (proprietary).
Initially, prop trading was not a product sold to the public, but an internal activity of investment banks, large brokerages, and financial institutions. This early development was purely institutional.
1. Investment Banks as Pioneers of Prop Trading Development
In the mid-to-late 20th century, major investment banks in the United States and Europe began allocating a portion of their capital for speculative trading. The goal was clear: to generate profits exceeding what they could get from traditional services (such as underwriting or merger advisory).
Imagine this: A bank like Goldman Sachs or JP Morgan has surplus capital not used for loans or client services. They then form elite teams of traders who are given that company capital—often in the billions of dollars—to take large positions in stock, bond, commodity, and foreign exchange markets.
At this time, prop trading was the exclusive domain of bankers and institutional traders. These traders worked on busy trading floors, using the best connections and information to generate alpha (returns exceeding the market).
2. Prop Trading as an Institutional Revenue Engine
In the pre-2008 crisis era, prop trading activity was one of the largest revenue engines for many investment banks. Profits from this activity often reached tens of percent of the bank's total annual revenue. However, along with massive profit potential, the risks posed were also massive, as losses suffered by the prop desk directly affected the bank's financial stability, and ultimately, the entire financial system.
The Digital Era and the Rise of HFT (1990s to Early 2000s)
Technological developments, especially market digitization and the emergence of the internet, fundamentally changed the face of prop trading, allowing development in a more independent direction.
1. Decentralization and Market Access
In the 1990s, markets began shifting from physical trading systems (open outcry) to electronic systems. This reduced the dominance of large banks and allowed for the emergence of independent prop trading firms focused on execution speed.
These firms (often based in Chicago or New York) were not affiliated with banks. They recruited talented traders, provided advanced technological infrastructure, and allowed their traders to use company capital. However, this model was still very exclusive and limited to professional traders working from company headquarters.
2. High-Frequency Trading (HFT)
The early 2000s period birthed HFT. HFT is a form of prop trading that relies on super-fast algorithms to execute trades in milliseconds. Pure HFT firms (like Citadel Securities or Jane Street) invested heavily in technology, placing their servers as close as possible to stock exchanges to gain speed advantages.
The development of HFT showed that prop trading was not just about intelligence and market experience, but also about technological superiority.
Global Turning Point: The 2008 Financial Crisis and Prop Trading Regulation
The global financial crisis of 2008 became a pivotal moment that reshaped The History of Prop Trading and Its Development Around the World.
1. The Threat of Moral Hazard
The crisis revealed how risky it was for large banks to use depositor money (guaranteed by the government) for speculative trading. When bank prop desks suffered massive losses, the government eventually had to use taxpayer money (bailout) to save the banks so the system wouldn't collapse. This is known as moral hazard.
2. Implementation of the Volcker Rule
In response to the crisis, the United States passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which included the Volcker Rule.
The Volcker Rule broadly prohibits banks that receive federal guarantees (such as commercial banks) from engaging in short-term proprietary trading with high risk that is unrelated to client services.
The implementation of the Volcker Rule forced investment banks to dissolve their internal prop desks or move them to separate entities. Thousands of top traders suddenly lost their desks.
Impact of the Volcker Rule:
- Institutional prop trading inside large banks shrank drastically.
- Many bank traders left and established their own independent prop trading firms, which were now not under the bank umbrella. This triggered the growth of smaller independent prop firms.
Modern Prop Trading: Democratization of Capital and Global Development (Post-2010)
After the Volcker Rule limited banks, the next wave emerged thanks to technological innovation and the need for retail traders for larger capital, marking a new chapter in Development Around the World for this industry.
1. Retail Prop Firms: Changing the Business Model
In the mid-2010s, the prop trading business model we know today emerged: Retail Prop Firms (e.g., FTMO, The Funded Trader, etc.).
This model leverages two things:
- The need of smart retail traders who lack capital.
- Ease of access to digital trading infrastructure.
Instead of recruiting elite traders from universities, retail prop firms sell Challenges or Evaluations to individual traders worldwide. If you successfully prove your ability to manage risk and generate profit in the evaluation phase, the company will give you a Funded Account (capital account) and you will share the profits (profit split).
Important to note: This model often uses virtual capital (demo) during the evaluation phase and even in early funded accounts, with the company replicating profitable trades to their own real accounts. This is a key mechanism allowing companies to fund thousands of traders without risking overall company stability.
This model has democratized access to trading capital. A trader from Indonesia or Europe, with a relatively small registration fee, can now manage hundreds of thousands of dollars in capital—an opportunity once only possessed by traders on Wall Street.
2. Prop Trading Development in Indonesia and Asia
In Asia, and specifically in Indonesia, the popularity of prop trading exploded since the COVID-19 pandemic (around 2020-2022). Easy access to online platforms and aggressive marketing made many local Forex traders switch from trading their own small capital to Prop Firm Challenges.
Indonesia became a very dynamic market for the retail prop trading model because most traders want to get leverage and large capital without bearing the risk of losing personal capital.
However, this development is also accompanied by challenges, especially regarding regulation. Since most retail prop firms operate outside local financial jurisdictions, traders must be very careful in choosing trusted companies.
Prop Trading Today: Facing Global Regulation
After going through significant evolution shaping The History of Prop Trading and Its Development Around the World, this industry now faces new regulatory challenges.
Currently, in Europe and North America, regulators are starting to pay attention to this retail prop firm phenomenon. There is a debate about whether these companies should be classified as brokers, asset managers, or something else.
Although the retail prop trading model is very popular, it is important for you to understand the fundamental difference between institutional and retail models. Institutional purely uses company capital directly, while retail focuses on individual trader risk evaluation and usually uses simulation models or hedging against trades made by funded traders.
History has taught us that financial markets always adapt. Strict regulation on banks (like the Volcker Rule) actually triggered innovation in the independent sector, which now generates opportunities for retail traders.
If you want to understand more about the current conditions, including why so many individuals are switching paths, you might want to read our article on Why Many Forex Traders Are Switching to Prop Firms.
Empowering Conclusion
We have seen how The History of Prop Trading and Its Development Around the World moved from secretive investment bank activities to a global phenomenon accessible to anyone.
From smoke-filled trading floors in New York to ultra-fast fiber optic internet connections, the core of prop trading remains the same: managing risk to generate profit from other people's capital.
For those interested in entering the modern world of proprietary trading, this journey is proof that opportunities always exist for those who have the skills.
Prop trading is not a shortcut to instant wealth. Instead, it is a career path demanding meticulousness, discipline, and strict risk management. If you want to succeed, you must have the same mindset as institutional traders—responsible and data-driven.
Understand its history, respect the rules, and prepare yourself to test your trading abilities at a higher level. Success always in your trading journey!
By: FXBonus Team
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