Proprietary Trading Glossary: A Comprehensive Guide to Prop Terms & Defnitions

To navigate the world of proprietary trading effectively, traders need to understand a diverse range of terms and concepts. This glossary aims to provide a comprehensive list of essential proprietary trading glossary in an alphabetical order, making it an invaluable resource for both seasoned professionals and newcomers to the industry.

Proprietary trading, often referred to as prop trading, is a unique and dynamic field within the financial industry. It involves trading financial instruments, such as stocks, bonds, derivatives, and commodities, using a firm’s own capital rather than client funds.


Algorithmic Trading: A strategy that uses computer algorithms to automate trading decisions, often based on predefined rules and patterns.

Alpha: A measure of a trader’s skill and the excess return of a trading strategy compared to a benchmark index, after accounting for market risk.

Arbitrage: The practice of exploiting price discrepancies for the same asset in different markets to make risk-free profits.

Asset Allocation: The process of distributing capital across various types of assets (e.g., stocks, bonds, commodities) to achieve a desired risk-return profile.

Automated Trading System (ATS): A computer program that executes trading orders automatically based on predefined criteria and algorithms.


Backtesting: The process of testing a prop trading strategy’s performance on historical data to evaluate its potential profitability and assess risk.

Bear Market: A market condition characterized by declining prices and a pessimistic outlook among investors.

Beta: A measure of an asset’s volatility in relation to the overall market, helping assess systematic risk.

Bid-Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an asset.

Black Swan Event: An unexpected and rare event with a severe impact on financial markets, often resulting in significant losses.


Candlestick Chart: A graphical representation of price movements that displays the open, close, high, and low prices for a specific time period, helping traders analyze trends.

Collateral: Assets or securities offered by a trader to secure a loan or trading position.

Correlation: A statistical measure that indicates how two assets move in relation to each other, helping assess diversification benefits.

Counterparty Risk: The risk that one party in a trade may default on its obligations, potentially causing financial losses for the other party.

Cryptocurrency: Digital or virtual currencies that use cryptography for security and operate independently of a central authority.


Dark Pool: Private trading platforms that allow institutional investors to execute large trades with reduced market impact.

Day Trading: A strategy where traders buy and sell assets within the same trading day to profit from short-term price movements.

Derivative: A financial contract whose value derives from the performance of an underlying asset, such as options and futures.

Drawdown: The reduction in the value of a trading account from its peak to its lowest point before recovering.

Due Diligence: The process of researching and assessing the potential risks and rewards associated with a trading opportunity or investment.


Efficiency Ratio: A measure of a trading strategy’s performance, calculated by dividing the average profit by the average loss.

Equity Curve: A graphical representation of a trading strategy’s performance over time, illustrating profits and losses.

Exchange-Traded Fund (ETF): An investment fund that tracks an index or a basket of assets and is traded on stock exchanges like individual stocks.

Execution Risk: The risk that a trade cannot be executed at the desired price or time due to market conditions or technical issues.

Exposure: The level of risk associated with a specific trading position or portfolio, typically related to market movements or volatility.


Fiat Currency: Traditional currencies issued and regulated by governments, such as the US dollar or the euro.

Fill or Kill (FOK): An order type that requires an immediate and complete execution of the trade or none at all.

Front-Running: The unethical practice of a trader executing orders on their own behalf before executing orders for clients, taking advantage of the expected market impact.

Fundamental Analysis: An approach to trading that focuses on analyzing the intrinsic value of assets based on financial and economic factors, such as earnings, revenue, and economic indicators.

Futures Contract: A standardized financial contract that obligates the buyer to purchase and the seller to sell an underlying asset at a specified price and date in the future.


Gamma: A measure of an option’s sensitivity to changes in the underlying asset’s price, indicating how much the option’s delta will change with a change in the underlying asset’s price.


High-Frequency Trading (HFT): A trading strategy that involves executing a large number of orders in milliseconds or microseconds to profit from tiny price fluctuations.

Hedge Fund: An investment fund that employs various strategies, including proprietary trading, to generate returns for its investors, often with higher risk tolerance than traditional investments.


Implied Volatility: A measure of the market’s expectation for future price volatility of an asset, derived from option prices, often used in option pricing models.

Initial Margin: The initial deposit required by a broker to open a leveraged trading position, serving as collateral to cover potential losses.

Institutional Investor: Large organizations, such as pension funds, mutual funds, and banks, that manage significant amounts of capital on behalf of investors.

Intraday Trading: The practice of buying and selling assets within the same trading day to profit from short-term price movements, also known as day trading.


Liquidity: The ease with which an asset can be bought or sold without significantly affecting its price, a key consideration in trading.


Margin Call: A demand by a broker for additional funds or collateral from a trader when the account balance falls below a specified level due to losses.

Market Maker: A trader or firm that provides liquidity by quoting both buy and sell prices for an asset, facilitating trading for other market participants.


Naked Option: The sale of an option contract without owning the underlying asset, exposing the seller to unlimited risk if the option is exercised.

Net Asset Value (NAV): The value of a fund’s assets minus its liabilities, divided by the number of outstanding shares, used to determine the fund’s per-share value.

Nominal Value: The face value or par value of a security, typically used for bonds and fixed-income instruments.


Option Premium: The price paid or received for an options contract, representing the cost or income associated with the option’s purchase or sale.

Over-the-Counter (OTC): Trading conducted directly between parties without a centralized exchange, common in markets like forex and some derivatives.


Penny Stock: Low-priced stocks typically trading for less than a dollar per share, often considered speculative and risky.

Portfolio Diversification: The practice of spreading investments across different types of assets or asset classes to reduce overall risk.

Position Size: The number of units or contracts of a security or asset that a trader holds in a single trading position, determined by risk management strategies.

Price-to-Earnings (P/E) Ratio: A valuation ratio that compares a company’s stock price to its earnings per share, helping investors assess its relative value.

Proprietary Trading: Proprietary trading is a financial practice where a firm trades various assets using its own capital to make a profit, rather than trading on behalf of clients. It involves speculative trading, carries inherent risks, and can yield high returns or losses. It’s subject to regulatory oversight in many regions due to its potential impact on financial markets.
Check out another Prop Glossaries here.


Quantitative Analysis: An approach to trading that uses mathematical and statistical models to make predictions about asset prices, often involving algorithmic trading strategies.


Rate of Return: The percentage gain or loss on an investment relative to its initial cost, often used to assess investment performance.

Regulatory Compliance: Adherence to laws, regulations, and industry standards governing financial markets and trading activities.

Reversal Pattern: A technical analysis pattern that suggests a potential change in the direction of an asset’s price movement, such as a head and shoulders pattern.

Risk Management: Strategies and techniques employed to mitigate potential losses in trading, including stop-loss orders, diversification, and position sizing.

Risk-Adjusted Return: A measure that considers the level of risk taken to achieve a certain return, helping assess the efficiency of a trading strategy.


Securities and Exchange Commission (SEC): The US regulatory agency responsible for overseeing securities markets and enforcing securities laws.

Short Selling: The practice of selling assets that one does not own, with the intention of buying them back at a lower price to profit from a price decline.

Slippage: The difference between the expected price of a trade and the actual executed price, often occurring in fast-moving or illiquid markets.

Speculation: A trading strategy that seeks to profit from price movements without a fundamental interest in the underlying asset, often associated with higher risk.

Spot Market: A market where financial instruments are traded for immediate delivery and settlement, as opposed to futures or options markets.


Technical Analysis: An approach to trading that analyzes past price movements, volume, and chart patterns to predict future price movements.

Tick: The smallest price movement an asset can make, often used to measure price changes in financial markets.

Trader Psychology: The study of psychological factors that influence trading behavior and decision-making, including emotions, biases, and risk tolerance.

Trading Plan: A detailed document outlining a trader’s goals, strategies, risk tolerance, and rules for executing trades.

Trading Platform: A software application that provides access to financial markets, allowing traders to execute orders, analyze data, and manage positions.


Underlying Asset: The financial instrument on which a derivative contract is based, such as a stock, commodity, or currency pair.

Unrealized Gain/Loss: The paper profit or loss on an open trading position, which has not been realized until the position is closed.


Value at Risk (VaR): A statistical measure used to estimate the potential loss an investment portfolio may face over a specified time horizon, at a given confidence level.

Volatility: A measure of the variation in an asset’s price over time, indicating its level of risk and potential for price swings.


Wall Street: A metonym for the financial district in New York City, where many financial institutions and proprietary trading firms are located.

Wash Trading: A prohibited practice in which a trader simultaneously buys and sells the same asset to create artificial trading volume, often for deceptive purposes.

Weak Dollar: A term used when the US dollar’s exchange rate is falling relative to other currencies, potentially impacting international trade and investments.


Xetra: An electronic trading platform used for trading stocks and other securities in European markets, known for its efficiency and transparency.


Yield Curve: A graphical representation of interest rates on debt for various maturities, providing insights into economic expectations and market conditions.

Yield: The income generated by an investment, often expressed as a percentage of the investment’s value or face amount.


Zero-Coupon Bond: A bond that does not make periodic interest payments, but instead, it is sold at a discount to its face value and pays the face value at maturity.

Zero-Sum Game: A situation in which one participant’s gain is offset by another participant’s loss, with the total outcome equaling zero, as trading often is in financial markets.

Conclusion: This expanded glossary provides a comprehensive list of 100 proprietary trading terms, each with detailed definitions, to help traders and investors gain a deeper understanding of the complex world of proprietary trading. Mastery of these terms is crucial for making informed decisions, managing risk, and achieving success in the dynamic and competitive realm of financial markets.