Prop Trading: An Insider’s Guide to The Best Job on Earth (2024)

What is prop trading, exactly? How about this: Imagine a rich stranger believes in your trading so much, he’ll let you trade his own money. If you make a profit, you keep some of it. If you lose, you don’t owe him anything.

Sound nice? Prop trading might appeal to you.

Sound too good to be true? You may be surprised.

Prop trading is when a proprietary trading firm lets you trade their own money. Not client money, the firm’s money. They may also let you use their own private technology and services not available elsewhere.

Some prop firms for beginners focus on training traders, while some prop firms cater to more experienced traders.

Prop Trading is when a firm provides a trader with company capital and technology, in exchange for a share of the trader’s profits. Prop trading is shorthand for Proprietary Trading, which is a much broader industry than just a decade ago.

Prop trading used to be obscure; nobody outside NYC or Chicago knew about it. Anytime told someone what I did, I got a blank look and a dozen questions. #1: “What on earth is Prop Trading?”

#2: “Is that like the movie Boiler Room?” *face-palm*. Nope. How well do you know me?

They just hadn’t heard of it. And they assumed that anyone making money in the stock market had to be cheating in some way.

There weren’t many prop firms, and the ones that existed didn’t advertise. You really had to seek them out. Nobody who wasn’t an avid trader already had even heard of the concept.

A few things have changed since then, mostly in the last 5 years:

• A bunch of new prop trading firms, A.K.A. prop firms, started popping up.
• Most new firms are “online first”, remote trading firms, making them more accessible.
• Many of them are “trader funding firms”, rather than traditional prop firms
• With the new age of internet advertising, the new firms advertise heavily.
• In the last ten years, the last five especially, the public has taken more interest. More people explore trading for a living now than at any time I’ve seen. Commission-free trading, market volatility, and all things Covid-19 spurred that on.

Now, everyone and their sister wonders about proprietary trading and whether they could do it. And I think that’s a great thing!

Prop Trading is as legal as driving 34mph in a 35mph zone with all your tags up to date, headlights on, and both hands on the wheel.

Why does anyone think it’s not legal? I don’t know. Maybe it just seems too good to be true, that a company would give you money to trade with. Sorry to disappoint the haters…it’s legit and 100% legal.

The most important step to becoming a prop trader is to actually learn how to trade. I’m not being a smartass, really. Once you know how to trade for consistent profits, getting funded is just another process.

1. Learn how to trade and make consistent profits in the market each week, each month, throughout the year. Do it on a simulation account if you need to.
2. Sign up for an evaluation with a prop firm. You pay a fee, and they give you a simulated account they can monitor and control. Think of it like a tryout.
3. Trade the required number of days, follow the rules, don’t hit your max loss, and reach your profit target.
4. Get your paperwork, read it (review with an attorney if you want), sign it, and get set up with your funded prop firm account
5. Now you’re a prop trader.

There’s also the alternative of going to firms who do things the old-fashioned way:

• Apply for an internship, do the interviews and tests, be an intern for an indefinite period of time, and maybe get to become a trader
• Apply as an experienced trader (usually have to show 3yrs profit history), hope to get an interview and get hired. Start out on a simulation account anyway, most likely, before proving profitability and getting a prop account.

Or the semi-prop way:

• Deposit your own capital, usually a minimum of $10,000–25,000, in exchange for better leverage than retail gets (15x-30x)
• Otherwise, similar to retail, except you may have access to a live trading desk with other traders. They may also provide a trading computer, fiber connection, and proprietary software.

Read more details about proprietary trading jobs and how to get one.

Most prop traders get paid like salesmen on commission, except they don’t have to sell anything to anyone. When they make money with their trading, they get a percentage of their profits. A small portion of them also get a salary, but usually it’s just profit share. It’s typically a pure meritocracy.

Prop trading earnings may consist of:

• Straight profit split, no salary — Anywhere from 30% — 90% of your earnings, paid monthly, quarterly, or yearly. Most firms pay monthly.
• A combination of base salary and annual bonus — but this is usually only for traders working for a bank or a hedge fund.

Most prop traders don’t go into it for a steady salary. They want to maximize their potential earnings based on performance. That matches up with how most firms compensate traders.

Read more details about trader earnings and day trader salaries.

Consider you aren’t risking your own money, you may find that the potential juice is worth the squeeze.

Becoming a prop trader is like starting a business. A lot of the heavy lifting is front-loaded. Prop traders spend long hours learning and building their skills as a trader. Later on, they might work 5, 9, or 12 hours a day, depending on their strategy and the market environment.

When I first became a prop trader in 2007, I worked 10–12 hours a day. After the first year, I worked a regular 8 hour day, sometimes less, sometimes a little more.

Years later, it was 2020. We all remember how the market changed when COVID-19 started brewing in China. Governments started doing the chicken-little dance. The markets followed their lead.

The increased volatility and round-the-clock movement had me working 3am-7pm CT without more than a bathroom break or two. That was worthwhile for about a year, and then it wasn’t, and I started working regular hours again.

These days, I start pre-market work around 7am CT. I rarely trade in the afternoons and am done trading by 12pm CT at latest. I usually do my post-market work in the evening. Most days that’s 1–2 hours or less, for a total workday of about 6–7 hours.

Bottom line, be prepared to work longer than average hours at first. Once established, your strategy and current market opportunities dictate your schedule. You might have to be flexible and adapt during times of high uncertainty, but those pass.

TLDR: No brokers do proprietary trading anymore.

The cowboys of the proprietary trading world had their wild west heyday in the banks and brokerages . High salaries, outrageous bonuses, and no repercussions led to massive risk-taking. Nobody was thinking about the risks. We all saw how that played out.

Remember 2008? That was kind of ugly for most people, wasn’t it? Well, regulators thought so too, so they passed the Volcker Rule. Just like that, prop trading was no longer legal for banks.

Banks are still trading. They still have “Sales and Trading” desks. Mostly the traders on these desks have two roles, barely a fading shadow of the old prop traders:

• Trade customer order flow
• Structured hedging
• Market making
• Trading government securities
• Underwriting and associated trades

The language wasn’t shy about it, the Volcker Rule flat-out bans proprietary trading for banks. It defines proprietary trading as any transaction in which the bank is the principal buyer or seller.

A few things have been edited since then to create little gray areas. But if the banks are exploiting these gray areas, they’re not talking about it.

So, if you’re looking for a proprietary trading job at a brokerage or bank, I’m [not-so-]sorry to say, you’re SOL. Look for non-bank prop trading jobs instead.

The difference between market making and proprietary trading is primarily in how the money is made. Firms can be market makers while also having a proprietary trading arm, so the two aren’t completely separate.

But with market making, the firm must buy and sell at any price in order to maintain an orderly market. Market makers aren’t taking large positions one way or the other, they’re providing liquidity and hedging that liquidity.

Market makers make money on the spread they offer to both sides, sometimes in fractions of a penny per share. Meanwhile, prop traders seek to profit from directional moves in a security.

Prop trading is risky in the same way as professional fighting. Every time you step in the octagon, there’s a good chance you’ll get punched in the face a few times. But by training and honing your skills, you can hit back harder and more often than the market hits you, and you can win.

You already know trading involves risk. Every trade you risk potential loss for potential reward. That’s pretty simple.

Choosing it as a career is a different kind of risk, more like starting a business. Let’s compare (table couldn’t be included on medium, please reference it here: starting a business vs trading)

As you can see, while you don’t stand to lose a big chunk of your own money, you can lose other things — time being the most valuable.

I’ve started businesses, in addition to trading, and I’ve had some of them fail. I don’t look at that time spent as lost. I gained skills, experience, and relationships. If I failed at trading, I would have gained skills, experience, insight into markets and the world, and so much more.

Prop trading for a living can be risky, but it’s worth it. If you want to know how to mitigate some of the risks, read about proprietary trading jobs

Prop Trading is profitable in the same way professional golf is profitable:

• There are a handful of players who make disgusting money.
• There are a whole bunch who made it on the Tour and make a really nice living doing what they love.
• For every one of those, there are ten who spent years trying and never made anything, or never made enough to live on.

Just as in golf, there are many companies and employees who support the prop trading industry. Software and IT, programmers, and professional service companies all profit from a robust trading space.

Just like great prop traders can make an amazing living, good prop firms can also do well for themselves. The prop firms I know continue to have record years, with most of their revenue coming from trading profits.

Proprietary trading benefits:

• Traders and the firms they work for
• The market, by adding liquidity
• Investors, by providing liquidity for larger institutions managing investor funds
• Non-trader employees of prop firms
• Companies that provide services to proprietary trading firms

There’s no theoretical limit to how much a prop trader can earn, but there are probably practical limits. It might be tough to consistently make more than $20,000,000 per year as a lone trader.

When a trader gets to that level, or even above $10,000,000 a year:

• It’s a lot of risk to manage, and traders this size often have another person help with managing their trades
• The liquidity needed to trade the size required to make this kind of money, day trading, isn’t always there.
• After several years of earning at this level, they’re more likely to:
• Start their own hedge fund
• Retire and pursue some other long-held dream
• Spend more time investing their money elsewhere

Most traders will never reach that level, but good traders make a very nice living from trading. They often make more monthly than the average American makes yearly.

Read more about the earning potential of traders and what it takes to earn various levels of money in a proprietary trading job

Much like starting a business, you don’t need a degree to become a prop trader.

The exception to that would be, if you’re looking to get a trading job with certain firms, or as a trading intern at a brick-and-mortar prop firm.

I’ve traded alongside many traders who didn’t have degrees and still did quite well as prop traders. Some of them did better than me, and I have a degree.

A degree doesn’t usually teach you what you need for trading. The most relevant things it might give you are:

• Methods for doing research, finding information quickly, and analyzing data.
• Math skills, but you rarely need more than arithmetic. Business calculus isn’t something traders use a lot of.
• A taste of what it’s like to study for four years and reach a goal because of it.

The 7 Best Prop Trading Firms in 2023 (From Top 30)

Proprietary Trading Jobs: How to Get One

Disclaimer: Trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not indicative of future results.

Originally published at https://epicctrader.com on December 31, 2022. Some content has been removed by medium formatting limitations.

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