Pursuing Day Trading Jobs With Proprietary Trading Firms

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

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.

Being a Proprietary Day Trader

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.

Pros of Proprietary Trading

There are a number of advantages that come from working for a trading firm: 

  • Being surrounded by traders who can help you become profitable
  • Access to more trading capital than you would have on your own
  • Reduced commissions (typically) compared with what retail day traders face
  • Firm trading costs are frequently much lower than what traders could get trading on their own.
  • 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.
  • No need to worry about the $25,000 minimum account balance for day trading stocks.

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

    Cons of Proprietary Trading

    There are downsides to working for a firm compared with trading on your own:

    • Many firms have moved online because it is cheaper than having a brick-and-mortar business. This means you might not be sitting physically among experienced traders when you start out. Chat rooms and Skype are useful tools, but might not be as effective as having other traders in-person to answer your questions.
    • With more firms online, competition for seats on a physical trading floor is high.
    • Retail technology has diminished the advantage proprietary trading firms once had. Retail traders now have access to trading platforms and internet speeds that rival most proprietary resources.
    • 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.
    • Costs charged to traders 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.

    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.

    Typical Proprietary Firm Structure

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

    • The firm takes a cut of your profits, anywhere from 20 to 50 percent. 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 generate more income. The firm may also charge a seat rental or software fee. This model is popular in Canada and other parts of the world. 
    • The firm takes little or none of your profits, paying 90 to 100 percent of your gains. Firms leverage your capital, meaning you typically need to have several thousand dollars or more to get started. You get more capital than you would by trading on your own, but the firm is going to make money off of training fees, higher commissions, seat fees, and software fees. This model is prevalent in the United States.

    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 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.