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Benefits Prop Trading Firms

• Profits: The main benefit that prop trading provides a financial institution or bank is that it keeps 100% of returns. When a brokerage firm or investment bank trades on behalf of its clients, it earns revenues through commissions and fees which can represent a very small percentage of the total amount invested or the gains generated.
• Stock of securities: Prop trading allows firms to stockpile an inventory of securities. If an institution speculatively buys securities, it can offer an unexpected advantage to its clients. The securities can also be loaned out to clients that want to short sell. An inventory of securities can prepare firms for down or illiquid markets where it could be harder to buy or sell securities on the open market.
• Market making: Prop trading enables a firm to become a market maker. A firm with specific types of securities can provide liquidity for its investors on a specific security or group of securities.
• Technology: Prop traders have access to more sophisticated platforms and other automated software which also enables them to engage in high-frequency trading. In most prop companies, the platforms used are exclusively in-house and only available to the firm’s traders. With more advanced trading technology, prop traders can develop strategies and test the likelihood of success by running demos. However, retail trading is constantly advancing the technical quality of trading platforms.
• Reduced risk: Prop traders make no capital contribution; they trade with the firm’s money. Therefore, there is no risk of losing your own equity.
• Flexibility: Prop trading can be done remotely and prop firms attract many skilled traders who want to leverage their investment knowledge, step away from the corporate office setting, and trade online from home.
• Salary: If you work at a legit prop trading firm, the base salary can start at $100,000. Your bonus can also be 50-100% of your base salary though you won’t receive this if you lose money.

Drawbacks

There as some drawbacks of working at a prop trading firm:

• Entry fees: Online prop firms may require a sign-up fee to cover the costs of their qualification tests.
• Trading hours: Prop trading hours can be intense, averaging around 50 hours a week. This will vary depending on the firm and your seniority. Firms are focussed on your P&L so you won’t get a bigger bonus for working more hours. Your hours will also be dictated by the markets you trade and your geographic location. For example, if you’re in London but cover the UK, Europe, and the US, your working hours will be extended to fit those jurisdictions.
• Exit opportunities: Prop trading offers limited opportunities if you decide it is not for you or it doesn’t work out. The skills you develop in prop trading are very specific and may not be useful in other environments. The trading style from that of hedge funds or large banks is very different. Also, if you do not perform well, it makes it difficult to get another job in the same industry meaning a likely career change.
• Legitimacy: It is easy to get scammed by less-than-legitimate prop trading firms. These will often not pay a base salary and may ask you to pay for training.
• Highly competitive: Firms expect decent returns on the capital they invest and delivering on such expectations requires talent and skill. If you don’t perform, it can affect your career in the industry. Also, with more firms online, such as The Prop Trading, an Australian company, competition for seats on a physical trading floor is high.