Many day trading firms allow day traders to trade with a large capital pool given by them rather than day traders’ own money; thus, along with trading firms, day traders benefit as well. Questions like what is a prop firm, the structure of these firms, and how it is like to work for a prop trading firm may arise, which would all be answered through this article.
What is a prop firm? A proprietary trading firm or prop trading company represents an organization ( bank or firm ) that invests directly on behalf of the financial firm’s trading account. Proprietary traders use a prop firm’s own money to buy and sell assets. Prop funds pay their traders based on a profit split commission plan. A proprietary trading firm offers the structure in which traders get a part of the profit they generate by using a prop firm’s capital. Such advantages give traders the freedom to trade on high leverage without spending their own investment. Though along with such lucrative upside benefits, there are certain challenges for a day trader to work with a prop trading firm and fulfill the eligibility criteria.
Working for a Prop Trading Firm
A day trader is responsible for working with a day trading prop firm as a contractor, which means he is not a full-time employee. As they do not work as an employee, they do not get hourly wages, salary, or other benefits. They get paid when they make a profit, which sometimes can take weeks or months.
Day traders in a prop firm deal in the equity market, options and futures market, forex market, and much more; the purpose is to gain profit by trading. The good thing here is that a day trader in this structure has just the company for which he/she is trading as the client. As the primary focus here is to generate profit, a day trader is least concerned with how well a stock is fundamentally and where it would be in the future. An important point to note here is that traders in prop trading firms are not brokers or financial advisors; they are independent contractors.
There are various types of day traders in this setup. A few traders focus on large gains and take limited trades, whereas some day traders make hundreds of traders in a day. However, these trades are not large. Some traders trade only for a specific hour in the day. So, depending on the choices and willingness, the nature of day traders varies.
Many day trading prop firms give their day traders liberty to work from the office and home. Day traders have to go through training, but they might be given the liberty to work from home after a point in time. Most works from home day traders have years of experience and successful history of profitable trades; many are also hired for the same reasons.
Working for a prop trading firm as a contractor – example
The first step in my trading career is working for a prop trading firm. If the trader doesn’t have $100 000 capital, it is tough to make a monthly return to pay bills and feed the family as a professional trader. In that case, the trader can trade others’ company money, learn trading skills, share knowledge from other traders, etc. One of the most famous day trading prop firms is SMB Trading. Mike Bellafiore is the Co-founder of SMB Capital.
This company decided to be transparent and public, social networks active company. Using their SMB capital youtube channel, they reveal some trading secrets, traders’ hiring process. Their best traders share their knowledge with the internet community.SMB prop company offers training and trading products for new and semi-experienced traders.
What are the Benefits of Day Trading Prop Firms?
You can get certain benefits while working for a prop trading firm; some are listed below.
- Better chances of networking with other professional traders.
- Having the power to trade with a large pool of capital.
- Less amount to be paid as a commission compared to retail day traders.
- The cost associated with trading is also lower compared to trading as an individual.
- You might have to pay to get training as a prop firm day trader, but you get the best in class training to become a professional day trader.
- You also don’t have to keep the minimum balance of $25,000 for day trading stocks.
Are There Any Shortcomings of Prop Firms?
The grass looks greener on the other side, but everything that has a good side has a dark side as well. These are the shortcomings of working for a prop trading firm.
- Prop firms are moving online to benefit from the less expensive options. As a result, you may not get the chance to network with experienced day traders, and the online learning experience doesn’t give much leverage. There are many online tools available that provide a live experience, but nothing is great compared to sitting in the same room while day trading.
- There is high competition in this field, which you may have to face.
- Unlike earlier, now retail traders also have access to high internet speed and the latest trading tools, making them fierce competitors of prop traders.
- No doubt, retail day traders have a higher commission to pay; they can negotiate for a better rate with brokers, which is impossible for prop traders.
- Many firms also charge software access fees, rental fees, marked-up commission, to day traders, along with taking a certain percentage of profit from them. It can cost day traders a lot when combined.
For experienced traders, training may not be much important, so they should look for prop trading firms that lure them with lesser costs. For day traders hoping to join a prop trading firm full time by quitting their job, they need to keep in mind that this is not an easy task, and generating profits would take time, even months. Thus, better to first keep some reserve aside for yourself before diving into this field full time.
Proprietary Trading Firm Legal Structure
There are two types of structure for proprietary trading firms, as stated below.
1. No Capital, Profit Sharing Structure:
In the first structure, the prop firm takes a part of your profit, typically between 20 percent to 50 percent as their shares. Though the trader here has to put no capital out of his/her own pockets in trading. As stated earlier, traders have to pay for their training, though.
Based on your experience and skills, the prop firm would provide you with the trading capital. Day trading prop firms would also ask you to deposit a certain amount to safeguard themselves from losses made by you.
In this structure, prop firms earn the profit share taken from day traders. Commission charges are low here, which allows traders to make more money. These prop firms may charge software or rental fees. This kind of prop firm model is quite popular in Canada and many other parts across the globe.
2. No Profit Sharing, Capital Requirement:
In this structure, the prop firms do not ask for higher profit margins, and traders get to keep 90 percent or even 100 percent of their profits. But this is possible as here traders have their own money to trade. If you have thousands of dollars in your hands, you can opt for this structure. Prop firms leverage your capital, and as a result, you can trade on a higher amount than you have with you.
These prop firms charge day traders with higher commissions, training fees, software fees, seat fees, etc. In the United States, this type of day trading prop firm is very famous.
There are instances where a day trader can be offered salary and bonuses, just like an employee, along with the training. This is prevalent in a financial or commodity company having a separate trading floor. This job typically has 8 to 12 hours daily. Prop traders work for very little time, especially work from home day traders; they work for less than three hours daily. It is definitely very less compared to the day traders on a trading floor, but both have their own pros and cons.