Proprietary Trading – Pros and Cons: A Personal Experience Into Prop Trading Strategies - Quantified Strategies (2024)

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Proprietary trading – pros and cons – advantages and disadvantages

There are both pros and cons to being a proprietary trader. Proprietary trading might not be so different than retail trading and you can mostly trade proprietary trading strategies as a retail client. The biggest advantage of being a proprietary trader is leverage.

I was a proprietary trader from 2001 until 2018 in three different companies. How was it, and how does proprietary trading work? What are the advantages and disadvantages of proprietary trading?

Below you find out what a prop firm is, the pros and cons of proprietary trading, which proprietary trading strategies I traded, how it works, and which firms I used.

First, a disclaimer: I am by no means an expert in the business of proprietary trading but hopefully, I can provide some “insights” into the proprietary trading business via my trading. This article is personal and based on almost two decades of proprietary trading experience – not any summary made by someone with no trading experience.

What is proprietary trading?

The most basic definition of proprietary trading is trading to make a profit rather than earning a commission or trading on behalf of clients. Proprietary traders can be hedge funds, banks, brokerage firms, or many other types of institutions. The firms use their capital to engage in trading to make a profit.

In this article, we refer to proprietary trading as a firm that facilitates remote or on-site trading for small individual traders.

Worldwide, many proprietary firms welcome small and undercapitalized traders. These firms offer trading in a wide range of assets, like forex, stocks, commodities, or any other form of financial assets.

In this article, we only focus on prop firms offering stock trading, but in principle, it should apply to all types of firms, no matter their products.

Is prop trading illegal or dead?

For most of the world’s population, no, but for US citizens and residents, you need to be careful. The reason is simple: this is strictly regulated in the US, while the rules are laxer outside the US borders.

However, prop trading is a broad term, and there are prop traders in the US, but few are among the prop trading definition used in this article.

Why does proprietary trading exist?

Proprietary trading serves many purposes. Hedge funds are self-explanatory, and for financial institutions, the trading is mainly done as a separate profit center.

Additionally, firms can “stockpile” inventories for whatever reasons, for example, by later offering different services to their clients. Market-making is also a frequent cause for proprietary trading, for example, by providing liquidity in a specific security or group of securities.

For independent small traders, prop trading allows starting trading with a small amount of money and circumventing the limited leverage offered to retail clients.

A proprietary company trades its own account

Below is a sample from one of my agreements that illustrates how this works:

The company and you agree that you will, as an Independent Trader to the Company, select purchases and sales of securities for day-trades in the Company’s account, with funds provided by the Company……Your relationsjhip with the Company is that of an Independent Trader, and not an employee or a customer of the Company for any purposes….In order to induce the Company to provide you with access to its funds to enable you to select Stock Trades and keep a percentage of the net trading profits generated thereby, you agree to bear certain losses that result from you Stock Trades….The Company will track within a Company sub-account that it maintains with any securities brokerage firm that it selects, all transaction results for Stock Trades that you select….Those Stock Trades will be tracked separately from all other activity and transactions within the Company Account…..The Company will maintain a profit and loss record on the Trader Sub-Account, reflecting all profits and losses on the trades you make therin, net of all transaction fees, costs, and expenses incurred by the Company for such trades to be effected. You are under no obligation to repay any losses that exceed your equity. Therefore, you should understand that any losses on securities transactions in the Company Account, including the Trader Sub-Account, belong to the company, and not to you…..You represent that you are not a citizen of the USA.

What about the deposit? The agreement above says you are under no obligation to repay any losses.

However, this is offset by a “risk contribution” agreed upon between you and the company. The risk contribution determines how much leverage you are given. In another agreement, the risk contribution is specified explicitly in the agreement:

Therefore, it is the Company, and not you, who is the party to each Stock Trade, and, as between the parties to the Stock Trades and their respective brokers, it is the Company who is respnsible for such Net Trading Losses. Therefore, in order to carry out your agreement to bear the Net Trading Losses, you agree that upon the occurrence of any Net Trading Losses which is borne by the Company, the Company will be deemed to have made a loan to you in the amount of such Net Trading Losses. The loss will be offset by the trader’s risk contribution.

How do proprietary traders get paid?

The prop firms mentioned in this article distribute money based on the performance in your sub-account. In the agreement, this is mostly labeled as “services”. It’s solely your own profits and losses that determine if you get paid or not. You are not given any salary or fees for your “services” if you are a remote trader. Furthermore, any gains are most likely NOT treated as capital gains but as services for being self-employed.

How much do you get paid? Unfortunately, you are not paid out 100% of your profits (but you have to bear 100% of the losses). The risk is asymmetric. The payout is usually between 50-90% depending on commissions, negotiations, profitability, volume, etc. The agreement can vary from trader to trader. Thus, some companies offering on-site trading might offer different remuneration packages, perhaps even a salary.

Why be a proprietary trader?

One obvious conclusion to draw from the contract excerpts above is that you are not liable for any losses except for your risk contribution/deposit.

However, what happens if you have a black swan type of loss that blows your deposit and then some, is unclear. I guess it depends on the amount. I would assume they would ask you to please repay the losses…..

The observant reader might already realize that your deposit is at risk if the company goes bankrupt, either by a rogue trader or for whatever reason. Proprietary firms are not well-capitalized. Fraud is also pretty “common” in this business. Very few companies exist for more than 10-15 years.

A second reason for becoming a prop trader is leverage. If you are a retail trader you are limited by strict rules, while a prop firm can give you “endless” leverage. It’s an agreement between you and the management of the prop firm. This is, of course, a huge advantage for traders with small accounts. As a retail client, you face restrictions:

Retail vs. proprietary trading

The main difference is that proprietary traders trade the company’s capital, while a retail client trades his or her own capital.

Interestingly, and most traders are not aware of this, is that retail clients’ deposits are a liability in the books of the broker. When you buy, for example, Apple, it’s the broker that is the registered owner, while you are just the beneficial owner. If the broker goes belly up, you are paid by the insurance (SIPC in the USA) or have a claim against the broker. You can read more here:

  • Is Interactive Brokers safe?

As a retail client, you are limited to the regulated leverage and margin rules. Moreover, the US PDT rules are an obstacle for traders with less than 25 000 in their accounts.

How does remote proprietary trading work?

I traded remotely for 17 years, something I covered in my trading lessons. This structure might differ from a company that provides hands-on trading and supervising in an office. Mind you, a remote firm most likely doesn’t offer any help except to provide the infrastructure and leverage to trade. You are left on your own.

Remote proprietary trading works like this:

You deposit a small security deposit, for example, 5000 USD, and you get to trade with significantly higher leverage than the normal PDT rules. The commission is low and you get a split of the profits, for example, 85%. Some months ago, I contacted a Canadian firm and was offered a 90% payout, 50:1 leverage, and $1 per 1000 shares traded in commissions.

The software is usually licensed. I used Sterling Trader during all my years.

The observant reader probably notices that this setup resembles a “customer in disguise”. Up until 2012, some companies even paid out 100% of the profits. This didn’t go well with the SEC, and 100% payouts are not accepted anymore in the US. Luckily, the regulations are not as strict outside the US.

In house proprietary trading:

One option is to get “hired” by a proprietary firm and show up at the office every day while they teach and gives you the tools of the trade to succeed. Again, you don’t receive a salary, or at least it’s minimal, and you get a slice of the profits.

Proprietary trading instruments:

All asset classes can be traded proprietary. I suspect stocks and forex are the most widely used, but it could be futures, commodities, and derivatives.

Popular remote proprietary trading firms:

The most known prop firms in the US are Bright Trading, Hold Brothers, Schonfeld Group, and Kerschner Trading Group.

There are many small shops in Canada, for example, Global Market Trading. However, the turnover is high and you need to be careful who you are dealing with – many end up belly up.

Proprietary trading strategies:

If you trade remotely you are most likely left completely on your own. This means you can trade whatever strategy that works for you as long as you’re within the margin requirements.

This also leaves you vulnerable and no one lends you a helping hand. It’s recommended you learn trading through a mentor. This shortens your learning curve a lot.

The most popular proprietary trading strategies normally involve providing liquidity. This could, for example, be pairs trading or trading around the close and the open.

When I started as a remote proprietary trader, I did pairs trading. I have previously written about some of my proprietary trading strategies in this article:

  • How does pairs trading work?

At the time, pairs trading was a very popular proprietary trading strategy. However, the markets are more efficient now than 20 years ago, and this low-hanging fruit is mainly “arbed” away.

However, to this day, I still believe The Medallion Fund, the most successful hedge fund ever, uses market-neutral trading strategies:

  • How Jim Simons’ trading strategies made 66% a year

I managed to find other trading strategies and I stopped pairs trading. One of the proprietary trading strategies I used was acting like a market maker at the open and the first minutes after the open, and likewise, do the same in the closing minutes. This worked fantastic for about a decade before it gradually withered away.

Acting like a market maker is close to impossible as a retail customer. The reason is leverage. You need to send many orders and this drains your buying power. This is exactly one of the main advantages of being a prop trader: you can have tremendous leverage for strategies like these.

There are many ways to make money as a prop trader. There are probably a zillion prop trading strategies that still work, but you can be sure traders are not keen to share strategies if they have something working well.

Advantages with proprietary trading

Based on the information above, we can assemble a list of the advantages and disadvantages of proprietary trading:

Proprietary trading is good for providing liquidity via open orders:

If you trade at the open or in some way provide liquidity (which often requires many open orders), a proprietary trading firm is most likely a better option than being a retail client. As a retail customer, your orders are rejected when you reach your leverage limit. At Echotrade, I had more than one thousand open orders simultaneously.

Proprietary trading involves leverage:

Not only can you have many open orders, but you can also have many filled orders. In all my years, I never received any “margin calls”. I believe the leverage limits are not strictly enforced in most proprietary firms, especially if you have a long track record.

Proprietary trading offers an easy entry to trading for “undercapitalized” traders:

If you have less than 25 000 USD to invest, a proprietary account might be a good solution as your buying power can exceed anything you get as a retail client.

Furthermore, why keep your capital locked up as collateral (and be at risk) when you can use leverage?

Proprietary trading firms offer multiple trading platforms:

Proprietary firms normally let you choose among several platforms. As a retail client, you are bound to whatever the firm offers you.

In all my years, I only used Sterling Trader, a widely used platform among proprietary and retail traders. The interface looks a bit old-fashioned, but it worked flawlessly for me.

Proprietary trading lets you diversify and reduce risk:

Even if you have a big bank account, proprietary trading can be a viable option. You can have a small deposit and use margin, capital you can afford to lose, and invest the rest of your capital in stocks or mutual funds for capital appreciation.

Proprietary trading firms offer rebates:

Rebates are compensation given when you add liquidity to the market. All proprietary firms give you the rebate (if you provide it – see the explanation below in the links). As a retail client, you are unlikely to get the rebate.

  • What is rebate trading?

Proprietary trading offers big inventory lists for short sales:

To sell short you first need to locate shares. Some stocks may be on the threshold or “hard to borrow” list and may not be available for short selling.

As a retail client, you might have limited opportunities to locate shares to sell short.

Proprietary trading firms offer good support

Proprietary trading firms are normally closely-knit operations involving just a few people. Thus, they are always just a phone call away when you need to solve an issue. Opposite, try getting any help from your retail broker with millions of customers, like Interactive Brokers, for example. Good luck with that!

Disadvantages with proprietary trading

Unfortunately, as with all things in life, there are disadvantages to proprietary trading:

As a proprietary trader, your money is at risk:

Your deposit is not insured and is liable for business risk and fraud. Because of this, you only deposit money you can afford to lose. The good thing is that the deposit can be minimal, and a good trader can make a 100% monthly return on the equity.

As a retail client, your money is insured.

Proprietary firms are less regulated than retail brokers:

Most proprietary firms that provide remote trading are not regulated at all. That is both good and bad.

Not being regulated means less operating costs. The bad thing is that you can kiss your capital goodbye if the principals are crooks. As with any business, you need to judge the honesty and integrity of the principals.

Moreover, any rogue trader can put the whole firm in jeopardy.

Proprietary firms can steal your intellectual property:

If you’re an exceptional trader, you can be sure someone at the back office is working hard to decode your strategy. The managers can steal your strategies. I know this happened at one firm: A trader raking in money discovered that the principals piggybacked his trades with a machine.

Proprietary trading involves fees:

As a proprietary trader, you most likely face fees from the software you use, at least if you trade remotely. Monthly software fees normally start at 200 USD. As a retail client, you have less costs.

Proprietary trading is mostly about day trading:

Proprietary trading offers high leverage, but this applies only to day trading. You will not get much leverage by holding overnight. Moreover, most prop firms only offer day trading. None of the three firms I traded with accepted overnight positions.

My personal experience trading proprietary

I traded with three proprietary firms:

Echotrade LLC

Back in 2001, I started with the Phoenix-based Echotrade LLC, then the biggest rival of Bright Trading.

Echotrade required a series seven broker exam which was pretty cumbersome to pass and needed renewal every three years.

My deal with Echotrade was simple: I paid around 0.3 cents per share in commissions and received 100% of my profits. The problem was the financial regulator says this structure is a “customer in disguise,” and I believe this was the last nail in the coffin: Echotrade chose to wind down its business in 2013 (?) because of high costs due to regulation and scrutiny from the regulators.

Bright Trading managed to adapt and is still in business.

Nevis Trading

In 2011 I gave up Echotrade and made a small deposit in Nevis Trading, an offshore firm. The commission was 0.1 cents per share and an 85% payout. This was smooth sailing for a couple of years until I realized something was wrong. I stopped trading in 2013.

Later, they went belly up and all traders lost 100% of their deposits. To this day, I believe nothing is recovered, and two principals went to jail.

Global Market Trading

My previous trading firm was a small outfit in Quebec, Canada. It’s run by two very lovely French Canadians and I was a happy camper until I chose to stop day trading in 2018. The payout was 85%, and the commission was at a record low of 0.1 USD per 1000 shares (commissions are higher now).

Conclusion: pros and cons of proprietary trading

I want to advise anyone contemplating wiring their capital to a prop firm: make sure you do proper due diligence and know the risks involved. Your money is at risk both from excessive leverage and how the firm operates. Many prop firms have gone belly up or been fraudsters.

Make sure you understand your goals: perhaps it’s better to be a retail client? However, if you understand the risk and trust the management and its operations, proprietary trading offers many advantages, although it mostly involves day trading.

At the end of the day, the main advantage of proprietary trading is leverage, and the main disadvantage of proprietary trading is fraud.


– What is proprietary trading, and how does it differ from retail trading?

Proprietary trading involves trading for profit using the firm’s capital, while retail trading uses an individual’s own funds. Proprietary traders can access higher leverage and engage in various strategies.

– How does proprietary trading work, and what are the advantages?

Proprietary trading firms use their capital to trade for profit. The main advantage is the leverage provided, allowing traders to have larger positions. Proprietary trading can also offer liquidity, diverse trading platforms, and rebates.

– How do proprietary traders get paid, and what is the payout structure?

Proprietary traders receive a payout based on their performance in a sub-account. The payout, often between 50-90%, depends on factors like profitability, volume, and negotiations. Traders are not given a salary but share in the profits.

Proprietary Trading – Pros and Cons: A Personal Experience Into Prop Trading Strategies - Quantified Strategies (2024)


What are the pros and cons of proprietary trading? ›

As a proprietary trader, your money is at risk:

Because of this, you only deposit money you can afford to lose. The good thing is that the deposit can be minimal, and a good trader can make a 100% monthly return on the equity. As a retail client, your money is insured.

What are the negatives of prop firms? ›

- Traders in prop firms often have limited control over the firm's capital. They may need to deposit their own money as collateral or risk management. - Additionally, payouts are subject to the firm's rules, which may restrict a trader's access to profits.

What are the proprietary trading strategies? ›

Proprietary traders may execute an assortment of market strategies that include index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage, technical analysis, and/or global macro trading.

What are the advantages of trading with a prop firm? ›

Access to Capital: One of the most significant advantages of joining a prop trading firm is the access to the company's capital. Traders can leverage the firm's funds, which allows them to take larger trading positions than they could afford with their own capital. This can potentially lead to higher profits.

What are the advantages and disadvantages of trading? ›

However, the advantages and disadvantages of trading are two sides of the same coin. Quick money is tempting, but it comes with big risks, stress, and costs. Being successful in this kind of trading needs self-control, an understanding of how the market works, and being good at dealing with risks.

Why is proprietary trading bad? ›

Personal Risk: One of the significant drawbacks of prop trading is the potential personal financial risk. If a trader doesn't perform well, they may lose their deposit, and in some cases, their job. Loss Limitations: Prop firms often implement daily loss limits to protect their capital.

How stressful is prop trading? ›

Prop trading isn't all pomp and glamour either. It's a competitive, high-stress field with drawbacks like any other career. It's also awash with less-than-reputable firms that offer zero base pay, limited profit sharing and often make new hires pay for training and tech.

What is the risk of prop trading? ›

Profits from trades are generally divided between the firm and the prop trader; however, the risk distribution is asymmetric. This means that in the event of a loss, the trader bears 100% of the losses, while they don't receive 100% of the profits.

Is prop trading a good idea? ›

While prop trading is one of the most profitable opportunities, it is affected by asymmetric risk. This means that the profit-sharing ratio may be from 75% to 90%, but you bear 100% of the risk of your trades. When becoming a prop trader, you often need to deposit an amount of money known as your risk contribution.

Is proprietary trading illegal? ›

Prohibition on Proprietary Trading

The prohibition against proprietary trading applies not only to banks themselves but also to bank holding companies. Proprietary trading here is very broad, including almost all securities, derivatives, and futures.

How do proprietary traders get paid? ›

Hedge funds invest in the financial markets using their clients' money. They are paid to generate gains on these investments. Proprietary traders use their firm's own money to invest in the financial markets, and they retain 100% of the returns generated.

What does a proprietary trader do? ›

Definition and Overview

Proprietary trading, commonly referred to as prop trading, involves financial firms, especially those specializing in securities, equities, derivatives, forex, and the futures markets, trading their own money for direct profit, rather than earning commission by trading on behalf of clients.

Can you make a living with prop trading? ›

Prop trading can be lucrative, with earnings tied to a profit-sharing ratio. Unlike traditional brokers relying on commissions, prop traders' income directly links to generated profits. Ratios vary, often ranging from 75/100 to 90/100, offering flexibility based on experience and strategy.

Do prop firms give you real money? ›

While it's true that there have been instances of fraudulent prop firms, it's important to note that legitimate prop trading firms do exist, and they indeed pay traders based on their performance. It's crucial to thoroughly research and choose reputable firms with a proven track record.

Do prop traders make a lot of money? ›

In conclusion, the income of prop firm traders can vary greatly depending on several factors such as experience, performance, and the size of the firm. On average, a junior prop trader can expect to earn anywhere between $50,000 to $100,000 per year, while a senior trader can make upwards of $500,000 annually.

What are the advantages of proprietary? ›

What are the advantages of using proprietary software? Proprietary software often comes with professional customer support and regular updates, which ensure it stays secure and bug-free. It usually offers more sophisticated and unique features compared to free software, catering specifically to business needs.

What are the disadvantages of proprietary components? ›

Proprietary protocols are often restrictive, only allowing customers to install components from the same company due to compatibility issues. Additionally, any repairs must be done with associates from that company. This can lead to severely limited flexibility, high costs and suboptimal components.

Is proprietary trading worth it? ›

While prop trading is one of the most profitable opportunities, it is affected by asymmetric risk. This means that the profit-sharing ratio may be from 75% to 90%, but you bear 100% of the risk of your trades. When becoming a prop trader, you often need to deposit an amount of money known as your risk contribution.

What are the pros and cons of swing trading? ›

Swing trading offers advantages such as maximizing short-term profit potential, minimal time commitment, and flexibility of capital management. Key disadvantages include being subject to overnight and weekend market risk, along with missing longer-term trending price moves.

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