What is Proprietary Trading?

Proprietary trading has become a common career path for many over the years. Each and everyday thousands of people partake in prop trading. Traders are able to work at their own pace while building significant capital. As they gain experience and knowledge, traders of all levels are able to build a career while buying and selling various products such as futures, forex, shares and cryptocurrency. Below is some insight on the growing field of proprietary trading, pointing out the benefits when considering trading as a career path whether it be full time or part time.

What is Prop Trading?

Proprietary trading is the hiring of a third party (traders) by a prop firm to trade their capital. The company or proprietary firm shares all profits with traders while taking on the potential risks. Prop firms are designed to benefit both the firm and the traders, making it a desirable business venture for many. Each proprietary firm puts in place their own evaluation process. Through these evaluations, the firm is able to decide on the individual’s potential and understanding of the industry. Below we will look at the stages required for traders to evolve from a beginner trader to an advanced one.

  1. Nominal audition fee paid by trader 
  2. Evaluation period
  3. Trader successfully completes evaluation process
  4. Trader receives a funded account
  5. Trader is refunded the audition fee while having access to real funds to trade
  6. Trader gets a split of any earnings from this point forward

Proprietary trading firms are all inclusive. This is different from a hedge fund or an investment bank. If you are driven, hardworking and have a passion for trading, you can build a very successful business in this field. Traders have the ability to grow while buying and selling financial instruments. The process is very simple; complete the evaluation process, become funded and start making money.

Types of Prop Trading

There are a wide variety of proprietary firms available throughout the globe. The three most common types of proprietary firms are the traditional prop firm, prop shops and funded trading accounts. Each firm has their own distinctive specializations offering a variety of options to traders around the globe. Below is a breakdown of the main types of proprietary firms.

Traditional Proprietary Trading Firms

Traditional proprietary trading firms are the most restrictive form of prop trading. Traditional firms are the longest standing and are often quite firm and fixed when it comes to their components.

These types of firms use both the firm’s capital as well as the individual traders’ money. Traders must be certified by local regulators. One example of a regulator would be the UK Chartered Institute of Securities and Investment. In order to add value to firms’ operations, special technology-oriented skills could be required.

Prop Shops

Prop shops are firms where traders are responsible for providing a significant amount of risk capital. They offer traders access to markets and purchasing power. No formal qualifications are required. 

Remote Prop Trading Firms - Funded Trading Accounts

Proprietary trading firms are most commonly found online in the global trading world. Remote firms offer traders flexibility while providing them with the tools required to grow and eventually become a successful funded trader.

There are no qualifications required in remote trading firms. There are also no requirements when it comes to a trader’s experience. Traders do not have to use their own personal capital making it desirable and less risky. Many remote traders around the world have successfully grown and have earned funded accounts.

Prop Trading vs. Hedge Funds

There are several differences between proprietary firms and hedge funds. Below are some of the most important differences between the two:

  1. Prop firm capital is managed by traders. Hedge fund capital is managed by staffed fund managers.
  2. Prop firm traders are not required to be licensed. Hedge fund managers are subject to regulatory oversight.
  3. Prop firms permit traders to use the market as they see fit. Hedge fund managers are regulated by implemented company trading strategies.

Proprietary trading firms create the possibility for traders to become very successful. These firms do not require traders to have knowledge or experience in the field. By providing traders with the necessary tools for growth through consistency and dedication there is no limit in a traders potential success.

Volcker Rule & Prop Trading

In 2008, the Volcker Rule was established. It was put into place after the Global Financial Crisis mostly due to the burst of the mortgage bubble and credit freezes. The Volcker Rule states that trading securities, derivatives, options, futures, and commodities cannot be done by a bank. The rule also implements limitations between the interactions of banks, prop firms, private equity funds and hedge funds. The Volcker Rule was put into place to limit the trade of securities by banks.

Prop Trading - How to Get a Funded Trading Account and Start Trading

All proprietary traders become partners with their proprietary trading firm. Therefore, it is logical that traders invest in the most competitive and desirable firms. The ecosystem put in place stands out from all the rest.

These reputable firms provide traders of all levels with mentoring, educational tools, evaluation processes, market analysis and the endless support needed to succeed. Through the use of digital coaching, video tutorials, up to date analysis, 24-hour 7 day a week chat access and the list goes on. Proprietary trading firms are a one stop shop for all traders’ needs.