What are the pros and cons of prop trading? (2024)

Best Forex brokers

Topstep is a broker designed for active traders looking to enhance their skills. The company works with clients regardless of their trading experience, and when opening an account, it considers the results of trading on a simulation account.

Trade with This Prop-Trading Company If:

• You're Seeking an Easy Start in Prop Trading: Topstep allows the opening of an unlimited number of accounts, with the most affordable starting at just $49 per month. Additionally, express accounts are available for a one-time fee of $149.
• You Prefer Trading Without Restrictions: Topstep accounts do not impose a daily drawdown limit, only an overall drawdown limit under acceptable terms. For example, on a $50,000 account, the overall drawdown cannot exceed $3,000.
• You're Counting on a Profitable Partnership: Topstep's referral program offers the opportunity to earn 25% from each referral's transactions that benefit the company, including deposits, renewals, and resets.

Do Not Trade with This Prop-Trading Company If:

• You Require a Wide Range of Accounts: While many prop firms offer a variety of account options (6, 10, or more), Topstep provides only three account sizes: $50,000, $100,000, and $150,000.

FTMO is a prop trading firm that offers experienced traders the opportunity to manage funded accounts up to $200,000. The firm provides access to a wide range of instruments, including Forex, stocks, indices, commodities, and cryptocurrencies. To qualify, traders must successfully complete a two-step evaluation process.

Trade with This Prop-Trading Company If:

• Asset Variety is Important to You: FTMO allows you to trade an extensive range of financial instruments, including currency pairs, stocks, stock indices, commodities, and cryptocurrencies.
• You Want Flexibility in Account Scaling: FTMO clients have the opportunity to scale up their accounts by 25% every 4 months, provided they meet the straightforward qualification criteria, regardless of the initial account balance.

Do Not Trade with This Prop-Trading Company If:

• You Prefer Comfortable Challenge Conditions: FTMO's challenge lasts for 1 month across all accounts, and during this period, you must achieve at least a 10% profit on the provided amount.

What Is Prop Trading?

Proprietary trading, commonly known as prop trading, involves a financial institution such as a commercial bank, brokerage firm, or investment bank using its own capital, leverage, and resources to trade and speculate in various financial markets, including stocks, bonds, currencies, commodities, and derivatives. The primary objective is to generate profits from the firm’s own market positions and trading activities.

Prop traders execute trades based on the firm’s strategies, research, analytics, and risk appetite. Their compensation and bonuses are often directly tied to their trading performance and the profits they generate.

Distinction from Other Trading Activities

Proprietary trading is different from other types of trading conducted on behalf of clients. In prop trading, all profits and losses accrue directly to the firm’s accounts. This is distinct from market making, where firms facilitate trading by providing liquidity and taking the other side of client trades, aiming to capture the bid-ask spread rather than taking directional positions.

Key Players in Prop Trading

• Investment Banks: Many have prop trading desks that trade the bank's capital in markets such as equities, fixed income, Forex, commodities, and derivatives.
• Hedge Funds: Prop trading is central to their active trading strategies and use of leverage, with investments across diverse markets and asset classes.
• Commodity Trading Firms: Specialize in trading commodities and energy markets like oil and gas, using their expertise to trade for the firm’s book.
• High-Frequency Trading Firms: Utilize algorithms and high-speed technology to implement proprietary strategies and trade based on micro price movements.

Pros and Cons of Proprietary Trading

👍 Pros of Prop Trading

1. Increased Profits: Prop trading allows firms to earn higher profits compared to acting as brokers and earning only commissions.
2. Stockpile Inventory of Securities: Firms can accumulate inventories of shares or securities, which can be sold to clients when the market is illiquid or difficult.
3. Rebates: Prop trading firms offer rebates for adding liquidity to the market, which retail clients typically do not receive.
4. Good Support: Prop trading firms often provide quick and efficient support, as they tend to be closely-knit operations with fewer clients compared to retail brokers.
5. Leverage: Prop trading firms offer high leverage, allowing traders to hold multiple open orders simultaneously.
6. Liquidity via Open Orders: Prop traders can manage many open positions at once, providing better liquidity management than retail trading.
7. Easy Entry for Under-capitalized Traders: Traders with less than $25,000 can benefit from the buying power offered by prop accounts, which surpasses that available to retail clients.
8. Diversification and Risk Reduction: Prop trading allows traders to use margin and diversify their investments, reducing overall risk.
9. Multiple Trading Platforms: Prop firms often offer a variety of trading platforms, giving traders more flexibility compared to retail brokers.
10. Big Inventory Lists for Short Sales: Prop firms provide access to extensive inventories for short selling, which can be challenging for retail clients.

👎 Cons of Prop Trading

1. Less Regulation: Many prop trading firms, especially those offering remote trading, are not heavily regulated. This can reduce operating costs but increases the risk of losing capital due to potential fraud or mismanagement.
2. Risk of Losing Money: Deposits are not insured, and traders are exposed to fraud and business risks. It’s advisable to only deposit amounts that you can afford to lose.
3. High Fees: Prop trading firms often charge significant fees for software and other services, with monthly costs starting around $200, which can be higher than those faced by retail clients.
4. Focus on Day Trading: Prop trading typically emphasizes day trading with high leverage, while overnight positions usually offer less leverage.
5. Intellectual Property Risks: Exceptional traders with unique strategies may find their methods being decoded and used by the firm, potentially compromising their intellectual property.

Conclusion

Proprietary trading offers substantial benefits such as increased profits, access to capital, and flexibility in trading strategies. However, it also comes with risks, including less regulatory protection and higher fees. Understanding the pros and cons is crucial for anyone considering a career in prop trading.

For more detailed insights into the advantages and disadvantages of proprietary trading companies and how they operate, read our article: Proprietary Trading Explained. If you’re interested in prop trading, our guide on prop trading benefits might also be useful.