HomeWeb TradingProprietary Trading vs Market Making: A Useful Explanation

Proprietary Trading vs Market Making: A Useful Explanation


In the dynamic landscape of the financial market, two pivotal players, Proprietary Trading and Market Making, take center stage.

These financial activities, exemplified by industry giants like Citadel Securities and Virtu Finance, command the movement of billions of dollars daily within the bustling realms of Wall Street.

Delving beyond the surface, this article aims to unravel the intricacies of prop trading vs market making, shedding light on their unique roles and fundamental distinctions.

Join us as we explore the fascinating world where financial strategies converge and diverge, shaping the ebb and flow of the market.

What is prop trading?

Prop trading is a wide industry in the financial services industry. Broadly, it works in two main ways. First, it works in the form of hedge funds or home offices. In this case, traders use the company’s funds to execute orders. These traders are then compensated based on the profits they generate for the firm.

The other approach of prop trading focuses on the mass market. It is a process where a company hires traders from around the world, trains them, and then provides them with capital to trade. After passing the rigorous registration process, these traders take a cut of the profits they generate.

Prop trading is different from retail trading. In retail trading, people use their own cash to trade, often using a regular brokerage account.

There are some risks involved in prop trading. For example, since you are using a company’s funds, you must follow certain rules. Also, some prop trading firms halt your activity if you make some losses on a given day.

There are many prop trading firms, including FTMO, Day Trade the World (DTTW™), and City Traders Imperium.

What is market making?

Market making is the bedrock of the financial services industry in most countries. Ideally, when you buy a stock, you don’t do it directly from an exchange like Nasdaq and the New York Stock Exchange (NYSE). 

You basically place a trade through a broker, who then uses market makers, also known as wholesalers to execute the orders. This process is known as Payment for Order Flow (PFoF) and is used by all brokers in the US.

In this case, market makers receive the orders and execute them instantly and take a small cut of profit through the ask-bid spread. 

Some brokers, those with Direct Market Access (DMA), allow traders to select their market makers. Some of the top market making firms are Citadel Securities, Arca, and Virtu Finance.

Prop trading vs market making, key differences

Objectives (profits vs liquidity provision)

The most important difference is how they work. Market makers provide liquidity in the market and help it run smoothly. American brokers like Fidelity, Schwab, and Robinhood provide commission-free trades because of the compensation they receive from market makers.

Market makers simply help the smooth operation of the stock market in the US. The alternative would be to buy stocks directly from exchanges like NYSE and Nasdaq, which would be ineffective.

Prop traders, on the other hand, are interested in making money by predicting whether stocks will rise or fall. A prop trader who buys a stock at $10 and closes it at $15 has made a substantial profit. They can also make money by placing short trades, where they bet that shares will retreat.

But “making money” doesn’t have to be your mantra.

Risks involved

There are risks involved in both prop trading and market making. But they are quite different.

In prop trading, the risks involved are mostly related to the market. For example, there is a risk when you open a buy trade and the asset retreats. There is also the risk of your account being closed by the prop trading company for underperformance.

Market makers, on the other hand, face higher level risks. First, there are regulatory risks because of the perception that they game the market. In the United States, the Securities and Exchange Commission (SEC) has considered making significant changes in the market making industry.

Second, there are inventory management risks. Also, there are competition risks since the industry is highly competitive, with companies like Virtu Finance competing with the likes of Citadel and Arca.


There is also a big difference between market makers and prop traders based on their compensation. Prop traders are compensated based on their performance. Most prop trading companies let them keep over 80% of the profits that they make. 

Market makers, on the other hand, are compensated based on the number and volume of orders they facilitate. They take a cut based on the bid and ask for the spread of a stock or cryptocurrency. In most cases, this spread is usually tiny. 

For example, a stock’s bid/ask can be $10.10/$10.11. In this case, they will make just $0.01. The benefit is that they execute thousands or millions of orders every day. As such, a company like Virtu Financial made $469 million in revenues in 2022.


The other difference between market makers and prop traders is the strategies that they use. In prop trading, participants work to find trading opportunities in the market and execute them. Ideally, you want to identify buying and selling opportunities that work perfectly well.

In market making, the strategy is to maintain a good bid/ask prices in a bid to outshine their competitors.

By law, companies like Robinhood and Schwab are mandated to select the market maker with the smallest spread. Market makers, as part of their strategy, must also ensure inventory management.

Similarities of market makers and prop traders

As described, there are differences between prop traders and market makers. However, there are some similarities between them.

Liquidity provision

The first similarity is that market makers and prop traders are essential in providing liquidity in the market. Liquidity is defined as the ease of converting an asset or security into cash. Market makers provide liquidity by providing the bid and ask prices of stocks. 

In most cases, highly-traded stocks like Tesla and Apple have thinner spreads compared to smaller companies.

Prop traders, on the other hand, provide liquidity by providing funds in the market. Some big prop trading firms like Susquehanna, Optiver, Timber Hill, and Jane Street provide billions of dollars in liquidity every day.

Profit motive

Like all companies, the common denominator is the profit making motive. All prop traders and market makers aim to make a profit through their activities. In this case, prop trading companies make profits by predicting the movements of financial assets. 

Market makers, on the other hand, make money through the bid/ask spreads in the financial market. Their profits are based on the spreads and the number of orders they execute.

Use of technology

The other important similarity between prop trading and market making is their use of technology. All these entities rely on technology to generate profits and have an edge against their competitors.

The use of technology is more relevant to market makers, who execute orders within microseconds. They also want to have a big edge compared to their competitors.

Prop traders also use technology, with most of them focusing on algorithmic trading, which is usually highly complicated.

Actively involved in the market

The other similarity is that both liquidity provision and market making is that they are both highly involved in the market.

Market makers operate at all times when the market opens through its close. Their most active period is when the market opens because they execute orders that were initiated in the pre-market

Prop traders are also highly involved in the market. They work for longer hours to identify opportunities and execute them.

Why prop trading is better

Therefore, we believe that being a prop trader is better than market making for several reasons.

First, the barriers to entry in market making are higher than in prop trading. Anyone can become a prop trader by just opening an account online. At DTTW™, we have thousands of traders from around the world.

Market making is an established business that is already dominated by big companies like Citadel and Virtu. As such, the chances of succeeding in it are much lower.

Second, the regulatory environment is more friendly for prop traders than market makers. Prop traders are regulated more thinly than market makers, who are responsible for the functioning of the financial market.

Third, if you are a successful retail trader, it is possible to move into prop trading within a few days. It is quite difficult to become a market maker

Further, as a prop trader, you are only responsible for the funds that you can control. On the other hand, as a market maker, you are simply responsible for the functioning of the financial market, meaning that the stakes are higher.

Final thoughts

Market making and prop trading are an essential part in the financial services industry. In this article, we have looked at some of the key differences and similarities between how they work.

We have also explained why prop trading is a much better approach for making money than market making.

External useful resuorces

  • What Does a Market Maker Do, Anyway? It’s about Bridging the Gap – Td Ameritrade


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