Proprietary trading occurs when a firm or bank invests for its own direct gain instead of earning commission dollars by trading on behalf of its clients. This type of trading occurs when a firm decides to profit from the market rather than from the thin-margin commissions it makes from processing trades. Firms or banks that engage in proprietary trading believe that they have a competitive advantage that will enable them to earn excess returns.
A proprietary deal lets a specific buyer have a first chance to purchase a company before the company is presented to other buyers by the owner or an investment banker. Proprietary deals are often presented to specific buyers based on their perceived fit with the seller. While proprietary deals can be cost effective and closed more quickly than an auctioned process, the total purchase price and/or overall deal structure may not maximize value for the seller.