Day Trading Jobs: Working at a Proprietary Trading Firm

How to Nab That Prop Trader Job

day trading at a proprietary trading firm
Tetra Images, Getty Images

 

Day trading firms are scattered around the US, Canada, and the world. These firms provide traders with training and the opportunity to trade firm capital, receiving a cut of the profits in exchange. It can be a lucrative business, but also a tough one. Here's how day trading "prop firms" operate and what to expect if you get in.

What Are Proprietary Trading Firms?

Proprietary firms are called such because they each do their own thing.

Some firms provide traders with capital and/or training and then receive a cut of the day trader's profits. Other firms make money off of commissions and seat fees (seat fees are paying a fixed a dollar amount each month to maintain your seat on the trading floor), or a combination of all the above. Proprietary trading firms are structured in different ways. There are proprietary firms that focus on stocks, futures, currencies, or all of these markets.

What Is a Proprietary Day Trader?

A day trader working for a proprietary trading firm is typically a contractor, not an employee. Prop traders are not usually paid an hourly wage or salary and don't receive perks like health care. Instead, the contractor is only paid when producing a profit, which may take months when starting out.

A proprietary day trader trades stocks, currencies, options, and/or futures on major global exchanges, with the express purpose of producing a profit.

The day trader has no clients—except for the company he or she is contracted by—so there is no talking on the phone, sales, or cold calls. A prop trader is not a stockbroker or financial adviser. A day trader doesn't care where a stock will be next week or next year; they care about where it will in minutes, or even seconds, from now.

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 whole 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 with a history of success with the firm, or are hired as experienced traders with a proven track record.

Pros of Working for a Proprietary Trading Firm

The following are some advantages of working for a trading firm. 

  • Surrounded by other successful traders who can help you get profitable and stay there.
  • Access to more trading capital than you would have on your own.
  • Reduced commissions (typically) compared to what retail day traders face. Firm trading costs are typically much lower than what a trader could get trading on their own from home.
  • Access to training from professional day traders. You may have to pay for training, as this helps the firm eliminate traders who aren't serious.
  • Ability to work from home (possibly), if you develop a successful track record. Or, work on the trading floor if you prefer the excitement and interaction.

If you are new to day trading, then training is important. You want to be trained by people who produce successful traders and are not just making money off of training fees. 

Cons of Working for a Proprietary Trading Firm

The following are some of the more negative aspects of working for a firm, compared to trading on your own.

  • Many firms have moved online because it is cheaper than having a brick-and-mortar business. This, unfortunately, means you are no longer surrounded by other successful traders when you start out. Chat rooms and Skype are useful tools, but not as effective as having other successful traders there, in person, to answer your questions.
  • With more firms online and fewer physical trading floors, competition for seats on a physical trading floor is high.
  • Retail technology has improved to a point where the technological advantage of proprietary trading firms is diminished. Retail traders have access to trading platforms and internet speeds that rival most proprietary technology.
  • While the commissions charged by a prop firm may still be lower, active retail day traders may be able to negotiate better commission rates with their broker (better than the quoted commission rate).
  • A day trading firm has to make money. Fees charged by some firms include a seat rental fee, software access fees, and/or marked-up commissions. A percentage of the profits may also be taken, as discussed shortly.

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 for yourself or for a firm, understand that it may take several months or more to start generating an income, and the income may not be as much as expected because of trading hard. Income will fluctuate are there no guarantees of success.

Typical Proprietary Firm Structure

Like any job, you need to get hired. You'll need to submit a resume and cover letter and go through an interview process.

Proprietary trading firms typically have two model types, or a slight variation on them:

  • The firm takes a cut of your profits, anywhere from 50 percent to 20 percent, leaving you with 50 percent to 80 percent of your profits. The trader puts up little or no capital, although paying for training may be required. Firms may also require a deposit to offset any losses a trader incurs. Adequate trading capital is provided by the firm (based on experience and skill). With this model, trader profits are the main source of income for the firm. Commissions are typically low (firm makes little or nothing off commissions), allowing traders to make more, and thus the firm makes more. The firm may also charge a seat rental or software fee. This model is popular in Canada and in other parts of the world. 
  • The firm takes little or none of your profits, paying you 90 percent to 100 percent of your gains. Firms leverage your capital, meaning you need to have some of your own capital to get started...typically several thousand dollars or more. You get more capital than you would trading on your own, but for this, the firm is going to make money off of training fees, higher commissions, seat fees, and software fees. This model is prevalent in the US.

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 not being hired by a prop firm usually, rather you are being hired by a company to work on their trading floor (a division that trades company money). To land these types of jobs, a person typically needs to have a high level of education from prestigious schools or a successful trading track record. Hours for this job are typically long, from eight to 12 hours per day. Comparatively, prop traders typically work less than eight hours, and traders at home may work/trade for less than three hours. 

When you work for a prop firm, you are more likely able to create your own schedule since you are an independent contractor. So note the difference: prop firms typically contract traders under one of the two models mentioned above, and their main business is trading. Companies may have a trading division, where they hire traders as employees, but their main business may not be trading.

Over the years a number of structures have popped up, but even though those structures may seem different on the surface, legitimate firms usually end up falling into one of the categories above. If something seems shady, it probably is. Read all the fine print before signing on with a firm or handing over money.

To find other physical trading floors in your city, search "proprietary trading, YOUR CITY" on the internet. There is a list of proprietary trading firms here: http://leverageacademy.com/blog/proprietary-trading-shops/, although maintaining an up-to-date list of firms is difficult since many do not last. You can also look up "proprietary trader" on major job board sites.

Always be careful when handing over money to someone else or trusting them with your trades.