With falling yields and lacklustre retail participation, domestic brokerages are increasingly turning to proprietary, or prop, trading to boost their bottom lines. It is estimated that prop traders along with arbitragers and jobbers contribute to about 50% of the overall market turnover.

The share of prop trading as a percentage of the overall market turnover has risen to 32% in the second quarter of 2010 from 30% in the same period last year, data compiled from BSE and NSE shows. In the same period, the share of prop trading in the cash segment has declined to 20% from 26%, while that in the F&O segment has risen to 35% from 32%. The surge in prop trading is even more significant in the last two years , with its share climbing to 33% in the first six months of FY11 from 24% in FY08.

Brokerage yields have been hit in the past year as action has shifted to low-yield options segment and yields in the delivery segment of the cash market have come under pressure due to increased competition. Commissions on delivery-based trades vary depending on the volume of trade and can be as low as 0.1% for high-volume trades. This has prompted brokerages to turn to prop trade. Prop trading is beneficial as exchanges charge lower regulatory fees for trades done in a prop account vis-a-vis that done by retail customers. Incentives such as rebates on stamp duty are also offered.

Industry observers say many small brokerages are active in this space and several have taken a card solely for prop trading. Even brokerages that do not have a large prop book indulge in it occasionally when they have excess cash with them. Prop trades are preferred to parking cash with liquid funds that give returns of 4-5%.

Prop trading can be done by taking directional calls or taking arbitrage positions. ?A large portion of prop trading involves writing options, and using arbitrage opportunities on different exchanges and in the futures and cash market as the risk is minimal,? said Prasanth Prabhakaran, president ? retail broking, IIFL.

Says Vinay Agrawal, executive director, equities broking, Angel Broking, Sebi?s decision to allow automated and high frequency trading a year ago has given a fillip to prop trading.

Market participants believe prop trades will become commonplace once algo trading gains currency.