Proprietary trade
Also written Proprietary trading
A trade a stockbroker executes for its own account with its own funds, not on behalf of a client — distinct from the client orders it routes through its exchange terminal.
In plain language
A stockbroker's main job is to buy and sell securities for its clients. But a broker can also trade for itself, using its own money. The workbook calls this a proprietary trade.
All trades on a stock exchange must go through a registered broker's trading terminal. Client orders and the broker's own orders both flow through that same terminal. What separates a proprietary trade from a client trade is simple: whose money and whose risk sit behind the order.
A PMS distributor should be able to explain this difference to a client. When a portfolio manager buys a stock for a client's PMS account, that trade uses the client's funds, under the client's mandate. When a broker buys the same stock for its own book, no client is involved at all.
How it works
Routing (Chapter 2, section 2.2.2). Trades must be routed only through the trading terminals of registered exchange brokers, to be accepted and executed on the exchange's electronic system. A broker's proprietary trade uses the same terminal and the same electronic system as any client trade — the exchange does not distinguish the two at the point of execution.
Capital adequacy. SEBI's registration conditions look at a broker's office space, equipment, manpower and past trading experience. SEBI also requires brokers to deposit a base minimum capital with the exchange and caps their gross exposure at a multiple of that base capital — a link that applies to a broker's own book as much as to its client business. The workbook does not state the multiple or the base-capital figure itself; it only establishes that this linkage exists.
Brokerage. A broker earns brokerage, a commission, on client trades. A proprietary trade earns no brokerage — the broker is trading for its own account, so there is no client to charge a commission to.
A worked example
Meridian Securities Ltd is a registered stockbroker. On a single trading day it:
| Order | Whose funds | Type |
|---|---|---|
| Buys 500 shares of Company A for client Ramesh Iyer's account | Ramesh's | Client trade — brokerage earned |
| Buys 2,000 shares of Company A for its own trading book | Meridian's own | Proprietary trade — no brokerage |
| Sells the 2,000 proprietary shares two days later at a profit | Meridian's own | Proprietary trade — gain or loss belongs to Meridian, not to any client |
If Meridian is also the group broker for a PMS house managing Ramesh's money, a distributor explaining the relationship should be able to tell Ramesh that his own PMS trades are decided by the portfolio manager acting on his mandate, while Meridian's proprietary book is a separate risk that has nothing to do with his account.
Why NISM asks about it
Chapter 2 (Introduction to Securities Markets) introduces proprietary trades in section 2.2.2, while listing the intermediaries — trading members, depository participants, authorised persons — that make up the market's organisational structure. It is a short, factual definition, and questions typically ask what a proprietary trade is, or ask a candidate to pick it out of a list of transaction types.
Common exam traps
- A proprietary trade is not a discretionary PMS trade. A discretionary portfolio manager trades a client's funds under a mandate; a proprietary trade uses the broker's own funds for the broker's own book.
- No brokerage is earned on a proprietary trade — brokerage is a fee charged to a client, and there is no client here.
- The workbook gives no specific base-capital or exposure-multiple figure for a broker's proprietary book; it only states that SEBI links exposure limits to base capital.
Where this is taught
Free preparation for NISM Series XXI-ARelated terms
- Portfolio managerA body corporate registered with SEBI that, under a contract with a client, advises on or manages that client's securities or funds — discretionary, non-discretionary or advisory.
- Securities marketThe market in which securities are issued, purchased by investors and subsequently transferred among investors — the regulated channel that moves household savings to businesses.
- Dealing teamThe team a portfolio manager must constitute to place and execute all orders under its written policies, working from a restricted dealing room with recorded lines and full audit trails.
- Pool executionA PMS execution model: trading for all clients together and then allocating securities to each client's demat account — as opposed to trading in each client's own name.