Final answer:
A Prop Trader trades with the firm's own money, assuming market risk for the firm, whereas an Agency Trader executes trades for clients, acting as an intermediary without using the firm's capital.
Step-by-step explanation:
The difference between a Prop Trader and an Agency Trader lies in whose money they are trading with and on whose behalf they conduct trades. Option 1 of the provided choices is the correct one:
- Prop Trader is a trader who trades with the firm's own money. Proprietary traders make trades or invest in financial instruments with the firm's own capital rather than clients' money, aiming to earn a return directly for the firm.
- Agency Trader is a trader who trades on behalf of clients. Agency traders execute trades for clients on a commission basis, facilitating transactions without using the firm’s capital.
Therefore, a Prop Trader takes on direct market risk for the firm, while an Agency Trader acts as an intermediary for clients who wish to buy or sell securities.