Greetings traders and welcome back.
Thank you for joining me again for another In Depth with Chris episode.
In today's discussion, we're going to talk about proprietary trading.
I'm going to cover how it works, what it is, and some of the
advantages that come with being involved with a proprietary trading firm.
Proprietary trading is something that is searched
for quite frequently nowadays because traders are loving
the idea that it gives them a potential way to mitigate personal
risk without really putting the cap on their potential profit
ceilings. It's a wonderful idea in theory, and all parties win when done correctly.
We're going to cover all of that and more, so sit tight,
and if you are planning on passing the Gauntlet Mini, you
may not know it, but you're already involved in a proprietary trading process.
Without further ado, let's get going.
The concept of proprietary trading has been around for quite some time.
However, it really began to explode after the 2008 financial
crisis. But what is proprietary trading? Well, proprietary,
or prop trading, which is what you'll hear it referred to
commonly by traders online, refers to trading activities that
are carried out using the firm's own money.
That means the firm doesn't have permission to use deposits
or other client money to carry out trades that
it would generate profit from. That means the firm is trading
with the firm's money, or the traders that are trading at
the firm are trading with the firm's money, and not money
that has been accumulated from clients.
Now, this means that since the firm is using its own money,
it also bears all the potential gains and all the potential
losses. The departments carrying out any prop trading activity
are typically separate and don't have access to any client
funds due to the high regulations that are involved with running
and operating a proprietary trading firm.
The prop trading desk does have the ability to assist in market making activities,
however, it is not common. Most firms ensure that their desk
functions independently, For an independent individual, prop
trading involves using the capital of a firm to carry out
the trades. In this case, the individual acts as an agent for
the firm when they are trading at the proprietary trading firm. In return,
they take a cut of the profits that they're generating. The
firm generally trains the individuals, or accepts individuals
once they prove that they have the skills needed to entertain
a successful trading career at the proprietary trading firm.
There are different models that go into proprietary trading,
and we're going to cover all of those in just a moment.
There are three main models that you'll see proprietary trading
firms employ as you search through the sea of proprietary trading firms.
The first is the most common, and usually the most favored
by the trader, and that is the one that includes little to
no initial investment by the trader. The trader in this case
generally only bears the training expense, if any, and generally
doesn't have to put in any significant money to start trading.
In this situation, the firm generally takes a larger share of
the profit the trader makes. Hence,
the trader has not put anything in, so it needs to be worthwhile
for both parties. In some cases,
you may see that share go as high as 50%. However, that would definitely represent
the high side of that coin. Traders may also have to bear
additional costs like software fees as well.
Once again, that is going to be up to the individual proprietary
trading firm. Then, the second model option is the higher initial investment option.
This arrangement is a variation of the one we just talked
about, but in this case obviously, the trader is going to
be investing a little more early on. The trading firm itself
will expect the trader to invest most of the capital the
trader plans to trade with, however in return, they receive
a substantially larger share of the profits that they are
generating. This model is suitable for traders that have
a higher appetite for risk, or are just barely interested
in diving into the proprietary trading firm world. Finally, we have the hybrid model.
The hybrid model is a mix of the higher initial investment
and the little to no investment model.
We could consider this the medium investment sector, where
the trader is going to be investing a, what would be considered
a substantial amount of income, but not as high as the higher
initial investment sector, but definitely more than the little
to no investment sector. With this, the firm and the trader
are generally trying to split the risk associated with trading
itself, but also sharing in some of the profits. It increases
the ability for the trader to access more funds or capital
than they feel comfortable trading on their own, while also
mitigating some of that risk at well, but it comes at the
expense of some of their profit.
There are many advantages to being involved with the proprietary
trading firm for both the firm as well as the trader.
It is a mutually beneficial agreement.
The main benefits are listed as follows. The first being, access
to higher capital base for the trader. As we mentioned, the
prospects of prop trading provide opportunities for full-time
employment to the trader.
This may be the only practical option that a trader may ever
find in their trading career because they don't have the financial
ability to pursue trading as a full-time job
otherwise, without the proprietary trading firm.
This gives the traders access to more capital, and access
to more capital can allow their percentages to equate to
a larger amount of money, which can allow them to not need
a second, third, or fourth job.
Then, we have the fact that it is a lower level of risk. Prop
traders, in most cases, only put in a small sum of money, if
any, and typically the share that the capital firm contributes
is substantially higher, if not all of the money in general. This ensures that the
risk is really out of the trader's hand in this regard. If
the trader was using its own money,
well then, the trader stands to risk all of the money that
it has entered into the market, but in this situation, if the
trader has not put any of their own money at risk, well then,
what is the risk in that regard? Only the opportunity to trade
that account can be taken from them.
Then, we have the lower commissions and fees. When an individual
trades for himself, the brokerage fees and commissions can
be quite a lot higher. Prop trades are subject to lower fees
because trading costs for firms tend to be lower than those of retail investors.
There could be a significant reduction in cost since these
trades are carried out frequently and the volumes tend to
be higher. That is usually why the firm itself is offered
a lower price than a standard individual retail trader.
Trading for a firm also eliminates or reduces any account
maintenance charges for the trader. Then for number four, we
have access to training and trading platforms. Access to training
and trading platforms almost sounds like a tongue twister,
but the idea here is usually, at a prop firm,
they're going to provide access to training and trading platforms
that they feel will help your success, because if you are
trading at a prop trading firm, they want you to succeed
because once again, it is a mutually beneficial relationship.
If you are doing well, they are doing well.
If you are not doing well, then they are not doing well.
Everybody works in unison to achieve the same goal, and
this is a very, very appealing concept to many traders out there.
Now, the potential drawbacks to trading at a prop
trading firm, and that is: Sharing a portion of the profit
generated. This is not a joke.
This really is the only notable potential drawback that can
be associated with being involved as a trader at a prop trading
firm. The advantages to trading at a prop trading firm, as
we just saw, are a rather substantial list, and the list goes
on larger than I even shared there. Those are just the main
advantages that traders recognize, but the drawbacks really are
limited to the fact that you're going to share a small portion
of your potential profit. The degree of how much of the profit is shared is going
to be more or less tied to the model of the prop trading
firm of which you decided to join.
If you're a trader joining a firm that has a no initial deposit,
or no deposit required whatsoever,
generally the amount of profit you're going to share is going
to be higher because your risk is literally non-existent,
and the prop firm does need to to make money somehow to pay
the bills. At the end of the day, this is something that
is awesome for us as traders because it gives us the opportunity
to open so many doors without really any notable drawbacks
or risk, aside from the fact that we need to share in our
success with the institution that allowed us to find that success,
so really not any notable drawbacks.
You may be wondering, how can you go about finding a prop trading job?
Well, there are a lot of ways to go about doing it,
but the most common way to do it is to use the internet. Many
financial firms are posting their offerings online. That could be an open position,
it could be an attempt to pass something to prove your worth to the firm,
there are a number of things out there. Using the Gauntlet
Mini is an example of finding a way to become part of a prop
trading firm. If you pass the Gauntlet Mini, if you have the
skills to do so, then you are provided with a trading offer
of trading a large funded trading account. In which case, how does it work?
Well, you're going to share in the profits of the money that
isn't even yours, but you are going to make profit of money
that will become yours with the trading firm's money.
It's a wonderful scenario like we talked about, but the long
story short here is, if you are looking to find a prop trading
job, just simply look around at different firms online,
or use any of the job portals out there because you may find them there as well,
but Google will always be your best friend.
Let's cover some of the most frequently asked questions around the proprietary
trading world.
The first one is: How do proprietary trading firms make money?
Well, proprietary trading firms provide capital to traders
for carrying out trading activities in various financial
instruments. Any profit that is generated by the trader can
be taken by the firm as part of their profit sharing agreement.
Once again, generally speaking, the majority of the profit
generated by the trader is actually kept by the trader in
most cases, however, the degree of how much profit is taken
is something that the trader will be made aware of before
they begin trading with the firm.
Then we have: What is the prop trader's average salary?
This is a question that is just incredibly diverse because
it entirely depends on the prop trading firm at which the
trader is trading. Some prop trading firms actually provide
a salary to the trader with little to no profit sharing of the trades themselves.
Whereas other proprietary trading firms may provide a very
large portion of the profits generated from the trades that
the trader is making, with no actual salary.
That is the most common option, and the reason is, it encourages
the traders to actually be successful. It encourages the
traders to control their salary. In essence, if the trader
is going to be more successful, then their salary obviously,
and the amount of money that they're taking home is going
to be higher. Number three is: How much money can you make
in a proprietary trading job? Well, this is kind of tied in with number two.
If you're at a firm where you have a set salary, than the
amount that you're going to make is going to be the set salary
plus any bonuses that the firm might offer, or if you're at
a proprietary firm where you're earning based on a percentage
of your winnings, then that is entirely up to you.
The sky is literally the limit. The more successful you are,
the more you can make. There are plenty of proprietary trading
traders out there that are making upwards of two hundred
plus thousand a year on this model, making trades and taking
the profit from the trades with no base salary.
It is being done on a daily basis.
Once again, the amount of money you make is up to you.
In conclusion, a proprietary trading firm is a beautiful
opportunity for traders out there that are interested in
becoming professional traders, without the financial risk
of trying to get there with their own capital. It's a beautiful opportunity
for both the trader, as well as the proprietary trading firm,
and in the world of trading, it is probably the most beautiful
example of symbiosis that exists between a firm and a trader.
It's an awesome opportunity for both parties involved with
really no limit to how high that ceiling can go. Generally
speaking, the better the trader does, the more profit they
take home, which also means the more profit the firm takes
home, and everybody's happy. Everybody's celebrating together,
and that is a beautiful story indeed. I strongly wish you
the best of luck, and that was a strange way to say that, but
I do wish you the best of luck on your Gauntlet Mini experience.
Until next time folks, please make sure you click the like and subscribe button
down below, and I will see you all very soon. Cheers folks!