November 26, 2018
Day trading firms offer traders an opportunity to trade with a pool of capital rather than their own money in an arrangement that all parties can benefit from. Many proprietary trading firms set up a structure that allows the trader to receive a cut of the profits they generate through trades. This arrangement used by trading “prop firms” has the potential to be lucrative, but there steep challenges that can make it difficult to generate those profits.
A prop day trader typically works as a contractor to a proprietary trading firm rather than as an employee. Prop traders are not usually paid an hourly wage or salary and do not receive benefits such as health care. They are typically only paid when they generate a profit, which can take months. Prop traders work with stocks, currencies, options, and/or futures on major global exchanges, with the express purpose of producing a profit through their trades. A prop day trader has no clients except for the company he or she is contracted by. They do not engage in phone sales or cold calls with prospective customers. A prop trader is not a stockbroker or financial adviser and they do not care where a stock will be next week or next year. Their focus is on immediate trading trends. The types of proprietary day traders vary. Some only trade a few times a day for bigger gains. Other proprietary day traders make hundreds of small trades a day, jumping in and out of the market. Some trade the entire day, while others only trade certain hours of the day. Proprietary day traders may work out of an office, where they are initially trained, or some firms allow the trader to work from home. Day traders who are allowed to work from home are typically experienced and have a history of success with the firm, or are hired as experienced traders with a proven track record.
There are a number of advantages that come from working for a trading firm:
If you are new to day trading, then training is important. You want to learn from the people who produce successful traders and are not just making money off of training fees.
There are downsides to working for a firm compared with trading on your own:
If you are an experienced trader, then training isn’t as important. Instead, focus on finding the most competitive structure possible so more of your profits stay in your pocket. If you are considering quitting your current job to day trade, understand that it may take several months or more to start generating an income. That income can fluctuate with no guarantees of success.
Proprietary trading firms typically have two model types of a slight variation on them:
A trader may also be offered a salary plus possible bonuses and then trained or hired as an employee. This is more common with financial and commodity companies that also have a trading floor. In this case, you are being hired by a company to work on their trading floor (a division that trades company money). Hours for this job are typically long, from eight to twelve hours per day. Comparatively, prop traders typically work less than eight hours, and traders at home may work/trade for less than three hours.