Introduction Prop Trading

The allure of big money has many traders curious about prop firms.

What are they, how do they operate and how can I become one of the traders?

If you’ve wondered about these things, we’ve got great news for you!

In this article, we are going to take a deep dive into the world of proprietary trading. This will provide great insight into the possibilities of becoming a prop trader.


What is Prop Trading?

Proprietary Trading is when a firm uses its own capital to speculate in the markets for profit.

There are generally two types of players in this space: large financial institutions and small boutique firms

The institutions, which include brokerage firms and investment banks, hire experienced traders to trade hundreds of millions of dollars worth of assets each day.

Small boutique firms tend to hire both experienced and inexperienced traders, train them and provide buying power for them to trade with.

Prop traders do not handle any clients as their sole focus is to make money out of money.

To accomplish this, these firms allocate capital for the trader to speculate in their market of specialization.

So what markets do these firms trade?

These firms trade all markets including futures, options, currencies, and equities.


Prop Trading at Large Institutions

To better understand where proprietary trading started let’s take a look at how these large institutions operate.

Big banks often make a market to facilitate the services they provide. These services include managing financial risks, raising capital and executing FX transactions.

When they trade on behalf of a client, investment banks earn fees and commissions on the transactions.

While the bank is happy earning these commissions, they can enjoy full profits by trading on their own account.

Over time, traders in investment banks started devising strategies to earn profits independent of providing client liquidity.

This is how prop trading was born!

The Death of Prop Trading?

Since the financial crisis of 2008, the number of proprietary trading desks in large institutions has greatly declined.

This is due to the Volcker Rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Government regulators determined that large banks made too many speculative risks that affected the stability of the overall financial system.

To mitigate this risk, the Volcker rule generally prohibits banks from conducting speculative investments that present a conflict of interest with clients.

Since this law was implemented in July 2015, most large institutions have spun off their prop trading desks or shut them down altogether.

Prop traders in these institutions are employees of the firm. As such, they typically receive salaries and are awarded lucrative bonuses based on performance. If these traders don’t do well, they are often let go in short order.

Since there are few prop trading jobs left at large firms, this is not a career path most will get to experience.

Hedge Funds vs Prop Trading

The main difference between proprietary trading and hedge funds is that hedge funds are answerable to their clients.

They charge high fees to invest their client’s money and are paid to generate gains on these investments.

As prop firms trade their own capital and do not cater to clients, they make money solely by profiting from speculation.

Prop Trading at Small Boutique Firms

Boutique prop trading firms are available in most major cities via physical location or remote access.

These firms will often provide traders with access to training, capital, professional-grade software, reduced commissions and coaching/mentoring.

As they are often independently run, each firm will be different and operate under a slightly different model.

Prop traders at these firms may work out of the office where they were initially trained or work from home as remote traders.

The types of proprietary day trader also vary within each firm. Some only trade a few times a day for larger gains, while others jump in and out of the markets hundreds of times a day.

To earn your spot on the desk in a firm, you will often be required to submit a resume and go through an interview process. Many firms also require traders to complete a trading combine to prove their edge in the markets.

These combines vary across firms, however, their successful completion often requires traders to hit a certain profit target while managing risk effectively and adhering to all the rules. If a trader can pass this combine, they are on their way to a funded account.

Pay Structure

Contrary to the institutional side, a prop trader for a smaller boutique firm is not an employee. Rather the trader is a contractor to the firm that is paid based on trading performance.

Many boutique firms will employ a slight variation of one of these two operating models:

(1) The firm takes a cut of profits, anywhere from 20 to 50 percent. The firm may require a deposit to offset any potential losses by the trader. In addition to this, paying for training may be required. Once the trader has proven their edge, the firm will provide adequate trading capital. In this type of model, the trader puts up little or no capital and trader profits are the main source of income for the firm.

(2) The firm takes little to none of your profits, paying you 90 to 100 percent of your profits. In this model, the trader will typically need to put up thousands of dollars or more to get started. With this model, the trader gets access to more capital than they would from trading on their own account. However, the firm will make its money by way of training fees, marked up commissions, seat rental, and software access fees.


Many firms offer training programs to new hires that teach them about the markets. These courses are different across each firm as some firms will teach established strategies while others will expect their traders to develop their own strategies. If you are a newer trader looking for funding, be sure to do your due diligence here. Good quality education can shorten your learning curve and help progress to consistency sooner. If, on the other hand, you are already consistently profitable, you will want to focus more on the payout structure than training.


Final Thoughts

The prop trading industry is one of the most exciting fields in the world.

While the opportunities are limited on the institutional side, the emergence of the internet has made it more accessible to the masses.

Smaller firms can be found in major cities and are now accessible online via remote trading.

Traders around the world can now work from home for hours a day once they establish a proven track record trading firm capital.

By offering trading capital, training and an environment of successful traders, prop firms can be a great path for some traders.

If you have the motivation, desire, and perseverance to become a successful prop trader, prop trading can open up the door to life-changing opportunity.  Is prop trading the right path for you? We hope this article empowered you with the knowledge to make that decision.

The right environment, especially being around professional traders, can help progress your trading quite quickly.

If you want to join us in our live trading room, check out the Pro Trader package here >

Want to trade more passively, checkout our newsletter, trade ideas and live analysis in the Swing Trader package here >

The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.