Prop Trading or Pro Trading is short form of Proprietary Trading in stock broking industry. Proprietary means “own”. Many stock brokers have their own funds. brokers hire employees to trade on their behalf and/or they tie up with skilled derivatives experts known as Arbitrageurs*. Trading done by such employees or arbitrageurs* are referred to as Proprietary Trading.

The arbitrageur* gets registered with the stock broker by giving regulatory exams & completing any other formalities put forward by the broker. Arbitrageur* places an agreed amount as security deposit with the stock broker to guard the broker against any losses that the trades may incur. Broker provides trading limits to arbitrageur* on the back of this deposit. After charging a pre-decided rate of interest on trading limits, the stock broker passes on the residual trading profits to the arbitrageur*.

If you have any surplus on which you want to earn a steady/less volatile rate of returns that is much higher than fixed deposits/debt mutual funds, you can consider this product as investment option. You can place the funds as security deposit with the broker and earn returns on it.

While a stock broker usually accepts deposit from arbitrageurs*, investors can also invest under a tri-party agreement with broker and arbitrageur*.

Client accounts are different from Pro accounts in many ways. SEBI has stringent regulations and limits on how much limits can be provided by a broker to client. Presently, it is less than 100% of portfolio value. However, in proprietary account the limits available for trading in derivatives is much more than 100%. This benefits the arbitrageur* as more limits are available on the same deposit amount thereby making higher profits. More importantly, since higher limits are available, risk levels can be reduced to earn the same level of returns. In effect, the risk-adjusted returns can be much higher through Pro account.

There are two main risks in this investment:

 

  • Strategy Risk – If the derivative strategy fails and incurs a loss, returns will get impacted. We ensure this does not happen by using our team’s experience of over 25 years in the market. We take covered positions to earn steady rate of returns and continuously hedge the unwanted market/systemic risks.
  • Default Risk – If the broker goes bankrupt, there could be delay in getting your deposit back. Even though this risk exists on paper, brokers are well regulated by SEBI and have stringent norms to operate. At our end, we also do due diligence by analysing broker’s financial statements to ensure that a default is a highly improbable event.

Scale Up Financial is a registered arbitrageur* with few stock brokers. Scale Up’s team has rich expertise in derivative strategies with a unique delta hedging concept. The time-tested market neutral strategy added to the extra limits available in Pro account makes for a very effective investment product.

Contact us to know more about this!

*By reference of the term Arbitrageur, it means having cleared NISM – Derivatives exam and using its certificate to trade on the proprietary books of the stock broker