Trading in a Proprietary Firm vs. a Retail Account: Which is Better?
One of the most important questions to consider when starting your day trading career is whether to trade in a proprietary trading firm (prop firm) or through a standard retail brokerage account. Although I have worked my entire trading career in my own trading firm, I will present the pros and cons of each approach as I see them.
The advantages of trading with a retail account
First, let’s start by analyzing the advantage of using a standard retail brokerage account to day trade stocks. By standard retail brokerage account I mean brokers like Fidelity, E*Trade, Thinkorswim, TD Ameritrade, etc. You may even already have an account with one of these brokers for your personal portfolio or retirement plan.
This brings us to the first advantage of the retail brokerage route: the ease of opening an account and getting started. You can complete the application, transfer your deposit and start trading almost instantly. Unlike a prop firm, you don’t need to get hired and you don’t need to get a license before you can start trading.
The second advantage of day trading through a retail brokerage account is that you get to keep 100% of your net trading profits (after commissions, of course). A pro-trading firm will usually take an agreed percentage of your trading profits and this profit split will vary from firm to firm. With the caveat that it’s impossible to analyze the deal an advertising company is offering you by looking solely at the profit split without considering the costs of commissions, training, technology, etc., a typical split rate ranges from 50%- 90%
The final benefit of using a retail broker for day trading is that it gives you more flexibility in how you approach trading. If you are a growing trader at a support firm, you will be expected to be in the office (or your remote setup) from open to close to improve as a trader. Experience and screen time are key to accelerating your progress along the learning curve. As a retailer, you answer to no one. If you are unsure about making the necessary commitment to join a prop firm, trading a retail account can be a good test of your dedication.
The advantages of trading in your own trading firm
Now let’s discuss the advantages of trading in a proprietary trading firm. The first and most obvious advantage is that advertising firms usually offer high-quality training to their interns from profitable marketers. Now, some prop firms have better salespeople and better training than other firms (just like any other industry), so be sure to ask questions about the training program before joining any firm. But in general, prop firms specialize in day trading, so it makes sense that they would provide better training than a giant retail broker that aims to please everyone.
Another often overlooked benefit of trading at a prop firm is access to the firm’s capital. In trading, it takes money to make money, and the easiest way to access large amounts of capital is to prove yourself to an advertising firm. If an advertising firm keeps 30% of your profits (via your agreed percentage split) and they see that you’re doing well with little capital, it’s in their best interest to give you more capital so you can earn them (and thus yourself si!) more money. Compare this scenario to trading a retail account, where the broker will never decide to give you some of their money for free, no matter how well you do!
One of the main reasons I became so successful so quickly was that I was given progressively larger amounts of capital as I proved myself as a marketer for my provider firm. I went from trading a small account with $50,000 buying power to a very large account with multi-million buying power relatively quickly. If I had chosen to trade with a retail account instead of joining an ad firm, I would still be trying to grow my account organically.
Another benefit of trading at a prop firm is access to the firm’s technological resources. This includes expensive hardware, custom software, and lightning-fast direct links to major exchanges. Day trading has been compared to a computer arms race, and trading using off-the-shelf retail software on your home modem is like bringing a water gun to a duel. I’m not the most technically minded person in the world, so having an IT department that caters to my technology needs allows me to focus 100% on my trading.
The verdict: Which is better?
While each setup has its pros and cons, I think trading in a prop firm is the way to go if you’re serious about becoming a consistently profitable trader. The combination of excellent training, access to capital and technological advantages unavailable to retailers cannot be matched by a typical retail setup. If you are determined to succeed as a marketer, I recommend working for an advertising firm.
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