Today, day trading firms provide traders with the opportunity to trade using pooled capital instead of their own money, in an arrangement that benefits all parties. Many proprietary trading firms set up a structure that allows the trader to receive a share of the profits generated from their trading. This arrangement used by proprietary trading firms can be lucrative, but there are tough challenges that can make it difficult to achieve those profits.
Being a Proprietary Day Trader
A proprietary day trader typically works as a contractor for a proprietary trading firm rather than being an employee. They are usually not paid an hourly wage or salary, nor do they receive benefits like health care. They are generally paid only when they make profits, and this can take months.
Proprietary day traders work with stocks – also known as equities – currencies, options, or futures on major global exchanges, aiming to make a profit through their trades. A proprietary day trader does not have clients aside from the firm they are contracted with. They do not engage in phone sales or cold calls with potential clients. A proprietary day trader is not a securities broker or financial advisor and is not concerned with where the stocks will be next week or next year. Their focus is on immediate trading trends.
There are different types of proprietary day traders. Some trade only a few times a day to achieve larger gains. Other proprietary day traders make hundreds of small trades in a day, entering and exiting the market. Some trade all day long, while others trade only during specific hours of the day.
Advantages of Proprietary Trading
There are several advantages that come from working for a trading firm:
- Benefiting from experienced traders who can help you become profitable.
- Accessing more trading capital than you would have on your own.
- Lower commission costs compared to retail day traders.
- The firm’s trading costs are usually lower than the costs for individuals trading alone.
- Accessing training from professional day traders. You might have to pay for training, as this helps the firm weed out traders who are not serious.
- No need to worry about the $25,000 minimum account balance requirement for day trading in stocks.
If you are new to day trading, training is important. You want to learn from people who produce successful traders.
Disadvantages of Proprietary Trading
There are disadvantages to working at a firm compared to trading on your own:
- Many firms have moved online because it is cheaper than having a physical office. This means you may not be physically sitting among experienced traders when you start. Chat rooms and Skype are useful tools, but they may not be as effective as having other traders in person to answer your questions.
- With the increase in online firms, the competition for seats in the actual trading floor is high.
- Retail technology has weakened the advantage that proprietary trading firms used to have. Retail traders now have access to trading platforms and internet speeds that rival most private resources. Although the commissions charged by the proprietary firm may still be lower, active retail day traders may be able to negotiate better commission rates with their broker. Some firms charge traders seat rental fees, access fees for software, and/or higher commissions. A percentage of profits may also be deducted.
If you are an experienced trader, training is not important. Instead, focus on finding the most competitive structure to keep most of your profits in your pocket.
If
You were considering quitting your current job to day trade, but remember that it can take several months or more before you start earning income. This income can be volatile with no guarantees of success.
Typical Proprietary Trading Firm Structure
Proprietary trading firms usually have two types of models or slight variations on them:
- The firm takes a portion of your profits, ranging from 20% to 50%. The trader puts in little to no capital, although they may be required to pay for training costs. Firms may also require a deposit to cover any losses incurred by the trader. Sufficient trading capital is provided by the firm based on the trader’s experience and skill. With this model, the trader’s profits are the primary source of income for the firm. Commissions tend to be low, as the firm makes little or no profit from commissions, allowing traders to earn more income. The firm may also charge seat rental fees or access to software fees.
- The firm takes a small portion or nothing from your profits, paying you 90% to 100% of your profits. Firms utilize your capital, meaning you typically need to have several thousand dollars or more to get started. You gain more capital than you would trading on your own, but the firm will profit from training fees, higher commissions, seat rental fees, and software fees. This model is the most common in the United States.
A salary may be offered in addition to potential bonuses for the trader, and they may be trained or hired as an employee. This is more common with financial firms and commodity firms that also have a trading floor. In this case, you are employed by the firm to work on their trading floor, a department that trades the firm’s money. Working hours for this job are typically long, ranging from eight to 12 hours a day. In comparison, independent day traders typically work less than eight hours, and traders working from home may work less than three hours.
Frequently Asked Questions (FAQs)
How do you start a proprietary trading firm?
All you need to start a proprietary trading firm is a large amount of capital. Independent day traders use the firm’s capital, and if you are starting the firm, you will be the one providing it. Once you have the capital you need, you will hire traders to use that capital in the markets. You will also need to register your business entity in the structure that makes the most sense for your business.
Why are banks prohibited from proprietary trading?
A U.S. law known as the “Volcker Rule” significantly restricted banks from proprietary trading in the wake of the 2008 financial crisis. The goal was to reduce risky behavior in large financial institutions that consumers rely on. If risky day trading puts a bank at risk of closing its doors, for example, it could pose problems for any customers with checking or savings accounts at that bank. By prohibiting proprietary trading, the government aimed to separate investment banks from standard banks with checking accounts.
Source: https://www.thebalancemoney.com/day-trading-jobs-working-at-a-proprietary-trading-firm-1031233
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