Proprietary Trading Vs Retail Trading -What You Should Know - Quantified Trading Strategies (2024)

Proprietary trading, also known as prop trading, and retail trading are two completely different methods of earning profit from businesses. Retail trading involves a more traditional customer purchase experience, whereas proprietary trading occurs exclusively in stock and bond markets. Companies outside of financial institutions, including retail business locations, don’t usually engage in prop trading.

Retail Trade Differences

While proprietary trading involves purchasing stock and other securities to turn a profit, retail trading exclusively involves the sale of tangible goods for profit. Modern consumers needs and desires force many retail businesses to diversify product offerings to attract as many customers as possible. This phenomenon occurs in many coffee shops that incorporate retail sections where customers can purchase music, coffee-making equipment and store-branded merchandise.

One of the most important questions to consider when starting your day trading career is whether to trade at a proprietary trading firm(prop firm) or through a standard retail brokerage account. While I’ve worked my entire trading career at a prop firm, I’m going to present the pros and cons of each approach as I see them.

The Advantages Of Trading A Retail Account

First, let’s begin by analyzing the advantage of using a standard retail brokerage account to day trade stocks. By standard retail brokerage account, I’m talking about brokers such as Fidelity, E*Trade, Thinkorswim, TD Ameritrade, etc. You may even already have an account with one of these brokers for your personal portfolio or retirement plan.

This brings us to the first advantage of the retail brokerage route: the ease in opening an account and getting started. You can fill out the application, wire your deposit in, and begin trading nearly instantly. Unlike a prop firm, you don’t have to get hired and you don’t have to get licensed before you can begin trading.

The second advantage to day trading through a retail brokerage account is that you get to keep 100% of your net trading profits (after commissions of course). A prop trading firm typically takes an agreed-upon percentage of your trading profits, and this profit split will vary from firm to firm. With the caveat that it’s impossible to analyze the deal a prop firm is offering you by solely looking at the profit split without considering commission costs, training, technology, and so on, the typical split percentage ranges from 50%-90%.

The final advantage to using a retail broker to day trade is that it gives you more flexibility in how you approach trading. If you’re a developing trader at a prop firm, you’ll be expected to be in the office (or your remote setup) from the open until the close in order to improve as a trader. Experience and screen time are key to accelerating your progress along the learning curve. As a retail trader, you answer to nobody. If you’re unsure about making the commitment necessary to join a prop firm, trading a retail account could be a good test of your dedication.

The Advantages Of Trading At A Prop Firm

Now let’s discuss the advantages for trading at a prop firm. The first and most obvious advantage is that prop firms typically offer high-quality training to their trainees from profitable traders. Now, some prop firms have better traders and better training than other firms (like any other industry), so be sure to ask questions about the training program before joining any firm. But in general, prop firms specialize in day trading so it makes sense that they’ll provide better training than a retail brokerage behemoth that aims to please everyone.

Another often-overlooked advantage to trading at a prop firm is access to the firm’s capital. In trading, it takes money to make money and the easiest way to gain access to large sums of capital is to prove yourself to a prop firm. If a prop firm is keeping 30% of your profits (via your agreed-upon percentage split) and they see you doing well on a small base of capital, it’s in their best interest to give you more capital so that you can make them (and thus yourself!) more money. Contrast that scenario with trading a retail account, in which the brokerage will never decide to give you some of their money for free, no matter how well you’re doing!

One of the main reasons why I’ve been so successful so quickly was that I was given progressively larger amounts of capital as I proved myself as a trader to my prop firm. I went from trading a small account with $50,000 in buying power to a very large account with many millions in buying power relatively quickly. If I had chosen to trade a retail account instead of joining a prop firm, I would still be stuck trying to grow my account organically.

Another benefit to trading at a prop firm is access to the firm’s technological resources. This includes expensive hardware, custom software, and lightning-fast direct connections to the major exchanges. Day trading has been compared to a computer arms race, and trading using standard retail software on your home modem is like bringing a water pistol to a duel. I’m not the most technically-inclined guy in the world, so having an IT department handle my technology needs allows me to focus 100% on my trading.

The Verdict: Which Is Better?

While each setup has it’s own benefits and drawbacks, I think trading at a prop firm is the way to go if you’re serious about becoming a consistently profitable trader. The combination of excellent training, access to capital, and technological advantages not available to retail traders can’t be matched by a typical retail setup. For more information about Great Point Capital, the prop firm I trade at, please contact me using the contact form here.

Many newcomers to stock trading cannot tell the difference between a proprietary trading firm and an online (retail) broker. When deciding to open an account, traders make their comparison of brokers based on the relative cost and the products offered, but more often than not they fail to realize that the products are not exactly the same. This article seeks to shed light on the mechanics of a prop trading account and educate traders about the differences between the two options so that one can compare them more effectively.

The analysis has been provided in six key areas: software, rebates, fees, buying power, education and short locates (availability of hard to borrow securities). These are the areas in which the two are most distinctively different and are rightfully the most common factors considered in this decision. You as a trader will place a different emphasis on particular categories as you consider whether retail or prop is best for you.

Software

Retail – Retail brokers typically offer the ability to execute trades on their website. Most also offer their own trading platform at a monthly cost to the trader. This fee may be waived if you meet their minimum requirements for account assets.

Prop – A good prop firm will offer traders a choice between a few different direct access routing programs. A trader’s platform provides the ability to execute and monitor transactions quickly and effectively. A proprietary platform will have direct connectivity to the exchange matching engine. Hot keys are also a must have for intraday traders and are a feature offered in proprietary software, but not often that of retail firms. Most proprietary trading platforms provide access to more in depth real-time market data such as NASDAQ’s Totalview, ARCA Book, NYSE OpenBook, BATS and Direct Edge Books, although some of this data may come at an additional cost. Greater market depth and breadth can assist the trader in making better trading decisions on very active and heavily traded securities in real-time.

Rebates

Rebates refer to the compensation that ECNs provide to traders who add liquidity to the market. Most ECNs give rebates to traders who add liquidity and charge a slightly higher fee to traders who remove liquidity from their market center. This is a basic ECN business model, although there are a few ECNs that are structured differently.

Retail – In the vast majority of cases, retail firms do not pass on rebates to their traders. The online broker will most often route the flow to a low cost exclusive destination which does not cost extra and is not often directly to an exchange. If a retail trader chooses to route to a particular ECN, the additional fee on top of their flat commission rate may be passed through to the trader.

PropTraders who trade at a proprietary trading firm get the advantage of benefiting from the widely adopted “taker-maker” model that most exchanges offer. Traders who add liquidity will receive rebates for doing so in accordance with that exchange’s rates (which can be as high as $3/1000 shares). This can be a substantial source of revenue for the prop trader and will also influence his/her decision of which route to use.

Fees

Retail – The fee structure for retail firms will vary from shop to shop and the industry is highly competitive. One firm may offer no account transfer fees while another may advertise no inactivity fees. Still another may not charge for wires, but they may make this up in their commission structure. In general, retail firms have a flat, per trade commission rate that is charged. There is also usually a software fee for the platform unless you meet certain minimum asset requirements or if you are a very active trader. Some other incidental fees that you may incur are those that have been mentioned above.

Prop – Proprietary trading firms are able to offer more competitive commission and transaction fees than the online broker. Proprietary firms typically use a per share structure with breakpoints for decreasing your commission as your volume increases. This is often a direct benefit to intraday traders who have a high number of trades per day.

All prop firms charge a software or desk fee which goes to pay for the data and order entry software that the firm uses. Some offer this software “at cost” to their traders and some charge a premium on top of their cost. The variety of routes offered directly affects the desk fee as well, so ask your prospective shop about the routes available when talking about desk fees. For some traders, more routes is more value added.

Day Trading Buying Power

Retail – In retail accounts, your buying power is THE LESSER OF the equity in your account divided by .30 (the 30% minimum global margin requirement for equities) OR your SMA multiplied by 2 (which satisfies the Regulation T requirements for equity purchases). For day traders, you must have at least $25,000 in equity in order to do more than three round trips (day trades) in a rolling five business day period (FINRA Rule 2520). Outside of this model, certain accounts may be eligible for portfolio margin.

Prop – With a prop firm, your buying power is determined by the firm you’re with and the risk capital deposited. Some traders may be fully backed by a firm (true prop) in which case they can expect the firm to take a portion of profits to compensate for the risk taken. Many traders find trading prop more advantageous as they can trade a lot more capital that they would have access to in a retail account.

Day traders with less than $25,000 are prime clients of prop firms as they are able to trade freely without worrying about the minimum equity requirements enforced by FINRA Rule 2520. This is because most prop firms are set up so that traders trade sub accounts of the firm, but the firm “hits the street” as one large account.

Education

Retail – Many retail firms have educational information on their website. The breadth, depth and level of educational materials vary from firm to firm. The material is usually in the form of suggested reading, archived lessons and, occasionally, trading seminars.

Prop – Offerings for training in the prop field are highly sought after. Many traders who are beginning their trading careers look to prop firms with advertised training programs. Be cautious of firms that charge for educational classes and then provide firm capital for you to trade. Some of these firms are modeled to generate revenue from training which can cause a conflict of interest as their incentive to see traders last in the long run is greatly reduced. When a trader joins a prop firm and deposits risk capital, all compliant firms are required to hold your deposit for 12 months. Afterwards, the trader may receive his/her deposit back. In short, be aware that if a firm charges for training they may be trying to avoid the lock up period so they can treat it as revenue immediately.

Shorting/Locates

All traders, prop and retail, are subject to Regulation SHO which governs short selling in US markets. Traders must have located shares that they wish to borrow before selling short. Some stocks may be on the threshold list or “hard to borrow” list and may not be available. This list is updated every 24 hours.

Retail – If a retail trader would like to short a stock on the threshold list, there may be little that can be done to locate additional stock intraday and an opportunity may be missed.

Prop -Traders with a prop firm may submit locate requests before and during market hours in order to locate additional shares of stock on the threshold list.

As it happens, most traders begin trading in retail accounts due to their accessibility and pervasiveness in the investing community. Too many traders are unaware of the options available to them when it comes to cost structure, service and performance. It is my hope that this article will dispel some of the mystery and stigma from prop. Looking at these six areas, you can better determine if your style of trading is more suited for a prop account, or if you would be better off opening an account with a retail broker.

When choosing a firm in either category, research is paramount. Make sure your broker or trading desk has a sound reputation and make sure to ask the right questions. Talk to traders or read reviews on forums and trading websites. The better informed you are from the onset, the better your experience will be and the more comfortable you will be doing business with them.

Proprietary Trading Vs Retail Trading -What You Should Know - Quantified Trading Strategies (2024)
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