Proprietary trading refers to financial institutions or firms trading financial instruments, such as stocks, bonds, or derivatives, using their own capital instead of clients' funds. The goal is to generate profits for the firm itself, rather than earning commissions or fees from clients. This type of trading can involve various strategies, including market making and arbitrage. Firms engaged in proprietary trading often employ sophisticated algorithms and quantitative analysis to identify profitable opportunities. While it can lead to significant gains, it also carries substantial risks, as losses can directly impact the firm's financial health and stability.