“Many in investment banking commonly refer to all trading firms that aren’t investment banks as buy-side firms—something that isn’t quite accurate.”
Over the years, I’ve noticed a lot of confusion around the terms “sell side” and “buy side”—even among industry professionals, myself included! When I worked in investment banking, I often heard people refer to all trading firms that weren’t investment banks as buy-side firms—something that isn’t quite accurate. Later, after spending time in the trading world and learning from the excellent Robert Pullen, I’ve gained a much better understanding of these distinctions. I’m certainly still learning, but I hope to share some useful insights on how different trading firms operate and where they fit within these classifications.
How We Got Here
Since the 2008 financial crisis, proprietary trading firms and market makers have grown significantly in size and importance. This shift was driven largely by regulatory changes, particularly the Volcker Rule, which was introduced as part of the Dodd-Frank Act in 2010. The Volcker Rule restricted banks from engaging in proprietary trading using their own capital, forcing many investment banks to exit or scale down their trading desks.
As a result, independent proprietary trading firms and electronic market makers filled the gap, expanding their influence across global markets. Today, these firms are some of the most sophisticated players in trading, employing advanced quantitative models and high-frequency trading (HFT) strategies.
Are Trading Firms Really Either Buy-Side or Sell-Side?
To understand how proprietary trading firms and market makers fit within traditional classifications, it’s important to first define their primary functions. While hedge funds and asset managers are clearly on the buy-side, and investment banks are firmly on the sell-side, trading firms don’t fit neatly into either category.
Proprietary Trading: Seeking Alpha
Proprietary trading firms, often referred to as ‘prop firms,’ trade financial instruments using their own capital rather than executing trades on behalf of clients. Their goal is to generate profits by employing a variety of trading strategies, ranging from high-frequency trading (HFT) and statistical arbitrage to fundamental analysis and discretionary trading.
Unlike hedge funds, which manage external investor capital, proprietary trading firms take on full risk and reward. They focus on maximising returns through algorithmic strategies, quantitative modeling, and sophisticated risk management techniques. Many of these firms thrive on market inefficiencies, leveraging advanced technology and data analysis to gain an edge.
“Unlike hedge funds, which manage external investor capital, proprietary trading firms take on full risk and reward “
One defining feature of proprietary trading firms is that they are not beholden to clients—they trade purely for their own benefit. This allows them to take on risk in ways that traditional buy-side firms may not. However, it also means their success is entirely dependent on their ability to develop and execute profitable trading strategies.
Market Making: Providing Liquidity
Market makers continuously provide buy and sell quotes to keep financial markets liquid. Unlike purely directional traders, market makers are directionally neutral—they do not take outright bets on market movements. Instead, they trade around volatility and hedge their positions to ensure they are not exposed to long-term directional risk.
Another crucial distinction is that market makers do not have or serve clients—their purpose is to serve the market itself. By providing liquidity, they ensure smoother price discovery and reduce bid-ask spreads, making trading more efficient for all participants.
“Market makers do not take outright bets on market movements—they are directionally neutral.”
Market makers may also work directly with institutional investors, such as hedge funds, asset managers, and pension funds, to facilitate large trades and provide liquidity. Institutional investors are entities that pool large sums of capital to invest in financial markets, often managing funds on behalf of others. However, it is important—particularly from a regulatory standpoint—that these interactions are not considered client relationships. Market makers are not allowed to have clients in the same way that brokers or investment banks do, as their role is strictly to provide liquidity rather than act as fiduciaries or advisers.
A firm that engages in proprietary trading—trading its own capital for profit—may also engage in market making, where it provides liquidity to the market by continuously quoting buy and sell prices. The key distinction between the two activities lies in their objectives: proprietary trading is focused on generating alpha through various strategies, while market making is about ensuring liquidity and profiting from bid-ask spreads rather than market direction.
Why Trading Firms Defy Labels and Do Both
The reality is that nearly all major trading firms engage in both proprietary trading and market making to some extent. This is because the two activities complement each other in several ways. Market making provides a steady flow of liquidity, which allows firms to better manage their risk and execution. At the same time, proprietary trading enables firms to take advantage of market inefficiencies and generate additional returns beyond the spread.
In modern financial markets, firms that solely focus on one activity are increasingly rare. Market makers often incorporate proprietary trading strategies to enhance their profitability, while proprietary trading firms engage in market making as a way to manage order flow and execution costs. The evolution of electronic trading has further blurred the distinction, as firms deploy algorithmic strategies that both provide liquidity and seek out alpha opportunities simultaneously.
“In modern financial markets, firms that solely focus on one activity are increasingly rare”
Rather than being seen as separate categories, proprietary trading and market making should be understood as two interdependent components of a sophisticated trading operation. Firms that successfully integrate both activities tend to be more resilient, as they can adjust their strategies based on market conditions, volatility, and technological advancements.
The Industry That Refuses to Be Boxed In
If you’ve made it this far, you might be wondering: what exactly should we call these firms? You’re not alone. Despite their undeniable influence in modern finance, there’s no single, universally accepted term that neatly captures what they do.
Some sources, like Investopedia, define proprietary trading firms as those that “invest for direct market gain rather than earning commission dollars by trading on behalf of clients.” Meanwhile, the SEC describes a market maker as “a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price.”
The problem is that many of these firms do both—sometimes simultaneously. You might see them called liquidity providers, high-frequency traders, or simply trading firms, depending on who you ask and what aspect of their business they’re focusing on.
However, not all these labels fit perfectly. Take High-Frequency Trading (HFT), for example. While HFT refers to strategies that involve executing a large number of orders at extremely high speeds, not every trading firm employs high-frequency strategies exclusively. Many firms utilise a blend of high-frequency and other trading approaches. For instance, Jump Trading is renowned for its high-frequency trading strategies, focusing on algorithmic and high-speed trading across various markets.) In contrast, firms like DRW Holdings employ a diversified approach, engaging in both high-frequency trading and other strategies across various asset classes.
“Despite their undeniable influence in modern finance, there’s no single, universally accepted term that neatly captures what they do.”
Similarly, the term Quantitative (Quant) Firm suggests a reliance on mathematical models and algorithms to inform trading decisions. While this is true for many firms, it’s not the whole picture. Some proprietary trading firms engage in discretionary trading, where human judgment plays a crucial role. These strategies might be macro, focusing on economic trends; event-driven, capitalising on specific events like mergers; or fundamental-based, relying on financial analysis of companies. For example, Obliix Global is a proprietary trading firm that focuses on discretionary trading in equities and options.
Some firms themselves avoid labels altogether, instead leaning into descriptions like “technology-driven trading firms” or “quantitative research firms.”
Ultimately, the lack of a clear definition reflects just how fast-moving and adaptable these firms are. In an industry built on split-second decisions and cutting-edge technology, perhaps the best way to define them is not by what they are, but by what they do—profiting from market inefficiencies, providing liquidity, and shaping the financial ecosystem as they go.
Understanding the Trading Landscape
Instead of viewing proprietary trading and market making as mutually exclusive, it is more useful to understand them as interrelated activities within the modern trading landscape. Similarly, trying to classify these firms strictly through the lens of buy-side and sell-side can be misleading. These terms originate from traditional finance structures that don’t quite capture the full scope of what these firms do today.
Given this complexity, what is the best way to refer to them? While there is no universally accepted term, ‘trading firms’ seems to be the most straightforward and inclusive descriptor. That said, this industry evolves quickly, and a clearer consensus on terminology may emerge in time. Until then, perhaps the most important takeaway is not what we call these firms, but the vital role they play in shaping modern financial markets.