What is prop trading, exactly? How about this: Imagine a rich stranger believes in your trading so much, he'll let you trade his own money. If you make a profit, you keep some of it. If you lose, you don't owe him anything.
Sound nice? Prop trading might appeal to you.
Sound too good to be true? You may be surprised.
What is Prop Trading?
Prop trading is when a proprietary trading firm lets you trade their own money. Not client money, the firm's money. They may also let you use their own private technology and services not available elsewhere.
Some prop firms for beginners focus on training traders, while some prop firms cater to more experienced traders.
Here are some definitions of prop trading from some of my amigos (and a few villains). Now you can make your friends laugh at the bar while sharing your new knowledge of prop trading.
Unfortunately, Buffett isn't going to hand it to you on a silver platter.
Mr. Miyagi didn't teach trading, but he knew a thing or two about your need for discipline.
Prop Trading is when a firm provides a trader with company capital and technology, in exchange for a share of the trader's profits. Prop trading is shorthand for Proprietary Trading, which is a much broader industry than just a decade ago.
Prop trading used to be obscure; nobody outside NYC or Chicago knew about it. Anytime told someone what I did, I got a blank look and a dozen questions. #1: "What on earth is Prop Trading?"
#2: "Is that like the movie Boiler Room?" *face-palm*. Nope. How well do you know me?
They just hadn't heard of it. And they assumed that anyone making money in the stock market had to be cheating in some way.
There weren't many prop firms, and the ones that existed didn't advertise. You really had to seek them out. Nobody who wasn't an avid trader already had even heard of the concept.
A few things have changed since then, mostly in the last 5 years:
- A bunch of new prop trading firms, A.K.A. prop firms, started popping up.
- Most new firms are "online first", remote trading firms, making them more accessible.
- With the new age of internet advertising, the new firms advertise heavily.
- In the last ten years, the last five especially, the public has taken more interest. More people explore trading for a living now than at any time I've seen. Commission-free trading, market volatility, and all things Covid-19 spurred that on.
Now, everyone and their sister wonders about proprietary trading and whether they could do it. And I think that's a great thing!
Grandma
Sweetest woman you've ever met, God bless her
Is prop trading like the movie with Charlie Sheen? That Bud Fox was such a handsome young man. Is Michael Douglas going to fund your trading hobby? Of course, he should.
Is Prop Trading Legal?
Prop Trading is as legal as driving 34mph in a 35mph zone with all your tags up to date, headlights on, and both hands on the wheel.
Why does anyone think it's not legal? I don't know. Maybe it just seems too good to be true, that a company would give you money to trade with. Sorry to disappoint the haters...it's legit and 100% legal.
Let's see what these err...celebrities... have to say:
Sam Bankman-Fried
Founder of FTX, Crypto Ponzi Master
See, I just took all the money, and I bought all the sh*tcoins I wanted. But prop traders do it differently. They use Other People's Money for legitimate trading. They actually have permission to do it. Totally legal. Frankly I was confused, I didn't know I couldn't do that. I'm really sorry. Invest in my new startup?
Don't be like SBF. There's a legal way to trade with other people's money and keep the profits for yourself, and it's called prop trading.
How Do You Become a Prop Trader?
The most important step to becoming a prop trader is to actually learn how to trade. I'm not being a smartass, really. Once you know how to trade for consistent profits, getting funded is just another process.
- Learn how to trade and make consistent profits in the market each week, each month, throughout the year. Do it on a simulation account if you need to.
- Sign up for an evaluation with a prop firm. You pay a fee, and they give you a simulated account they can monitor and control. Think of it like a tryout.
- Trade the required number of days, follow the rules, don't hit your max loss, and reach your profit target.
- Get your paperwork, read it (review with an attorney if you want), sign it, and get set up with your funded prop firm account
- Now you're a prop trader.
There's also the alternative of going to firms who do things the old-fashioned way:
- Apply for an internship, do the interviews and tests, be an intern for an indefinite period of time, and maybe get to become a trader
- Apply as an experienced trader (usually have to show 3yrs profit history), hope to get an interview and get hired. Start out on a simulation account anyway, most likely, before proving profitability and getting a prop account.
Or the semi-prop way:
- Deposit your own capital, usually a minimum of $10,000-25,000, in exchange for better leverage than retail gets (15x-30x)
- Otherwise, similar to retail, except you may have access to a live trading desk with other traders. They may also provide a trading computer, fiber connection, and proprietary software.
Read more details about proprietary trading jobs and how to get one.
How Do Prop Traders Get Paid?
Most prop traders get paid like salesmen on commission, except they don't have to sell anything to anyone. When they make money with their trading, they get a percentage of their profits. A small portion of them also get a salary, but usually it's just profit share. It's typically a pure meritocracy.
Prop trading earnings may consist of:
- Straight profit split, no salary - Anywhere from 30% - 90% of your earnings, paid monthly, quarterly, or yearly. Most firms pay monthly.
- A combination of base salary and annual bonus - but this is usually only for traders working for a bank or a hedge fund.
Most prop traders don't go into it for a steady salary. They want to maximize their potential earnings based on performance. That matches up with how most firms compensate traders.
Read more details about trader earnings and day trader salaries.
Consider you aren't risking your own money, you may find that the potential juice is worth the squeeze.
How Many Hours Do Prop Traders Work?
Becoming a prop trader is like starting a business. A lot of the heavy lifting is front-loaded. Prop traders spend long hours learning and building their skills as a trader. Later on, they might work 5, 9, or 12 hours a day, depending on their strategy and the market environment.
Grandpa
Favorite Man to Have a Beer With. Paid $3,000 for his first house.
Why you so worried about the hours you might have to work? When I was your age, traders woke up at 4am and took a cab 20 miles into downtown, and then walked another 3 miles in the snow, just to get there before the open. They crowded into the pit with a bunch of other traders for 7 hours straight. Bunch of smelly, greedy bastards shouting at each other all day. Then another 4-hour commute home. All you have to do is sit at your computer.
When I first became a prop trader in 2007, I worked 10-12 hours a day. After the first year, I worked a regular 8 hour day, sometimes less, sometimes a little more.
Years later, it was 2020. We all remember how the market changed when COVID-19 started brewing in China. Governments started doing the chicken-little dance. The markets followed their lead.
The increased volatility and round-the-clock movement had me working 3am-7pm CT without more than a bathroom break or two. That was worthwhile for about a year, and then it wasn't, and I started working regular hours again.
These days, I start pre-market work around 7am CT. I rarely trade in the afternoons and am done trading by 12pm CT at latest. I usually do my post-market work in the evening. Most days that's 1-2 hours or less, for a total workday of about 6-7 hours.
Bottom line, be prepared to work longer than average hours at first. Once established, your strategy and current market opportunities dictate your schedule. You might have to be flexible and adapt during times of high uncertainty, but those pass.
Which Brokers do Proprietary Trading?
TLDR: No brokers do proprietary trading anymore.
The cowboys of the proprietary trading world had their wild west heyday in the banks and brokerages. High salaries, outrageous bonuses, and no repercussions led to massive ri