A lot of people, who want to start to invest on US Stock Markets, don’t understand the difference between trading in Proprietary Trading Firm and opening a standard account (retail account) at the broker. It is worthwhile to draw the attention to few important aspects that will help you to assess what kind of account would be more profitable for you and to understand the differences that divides Prop Trader and Retail Trader.
Prop trading .vs retail broker
Most of you will primarily pay attention to costs and commissions that are characterized by the given broker and this will be a base in choosing the best account up to investments. However, a level of costs and commission is not all; there is also other information that is important, such as:
credits (so-called rebates for added/taken liquidity from the market)
ETB (easy it borrow list – i.e. possibility of opening short positions) and Hard to Borrow list
Only the analysis of above aspects will allow you to fully understand the difference between accounts in the Proptrading Company and foreign broker.
Levels of charges and commission
Very important aspect, but it depends on the trader’s style of play and turnover which obtains. It is particularly important for one-session traders, who conduct large number of transaction within session.
Retail Trader – commissions usually calculated from opening the position, rather than from its size. This fee is usually much higher compared to commissions charged by the proptrading companies (e.g. 10$ for opening of the position of 1000 share, in comparison to e.g. 25c in the proptrading company). Additionally charged fees: for the platform (but here are also exceptions, particularly for traders reaching a specific turnover per month).
Prop Trader – proptrading companies offer very low commissions, usually calculated on single shares. For example it can be e.g. 25c/1000 shares or 15c/1000 shares. Many companies offer the commission level dependent on the turnover – the higher turnover per month generates investor, all the smaller commissions. Additionally, companies collect charges for the platform, which trader use and for quoting. Some companies also charge additional fees, so-called desk fee (this aspect depends on the fact whether you work directly in the Office or remotely as the remote trader).
Rebates, i.e. credit which are paid to traders using ECN to place an order. ECN pay or charge additional fees from investors depending on whether the trader added liquidity to the market (so-called adding liquidity, comparing to share market on the Warsaw Stock Exchange – limit orders) or took liquidity from the market (so-called removing liquidity, comparing to the Warsaw Stock Exchange – pkc orders).
Retail Trader – brokers set fixed charges for opening the position. Do not take into account the possibility of using ECN in trading, thus e.g. scalping is less profitable, and credit trading generally speaking isn’t important. At some brokers it is possible to use ECN or the broker automatically tries to send the order to the cheapest supplier.
Prop Trader – in proptrading companies, traders receive full possibilities which provides use of ECN. I.e. they are paid for adding liquidity and extra charges are collected for removing liquidity from the market. Additionally companies are providing traders full row of dark books and routers. Thanks to that, traders have a choice of ECN/Dark Pool/Routers, which cost for 1000 shares varies from 0.7$ to 4$ in removing liquidity or about 3$ in adding liquidity. These prices from time to time undergo changes.
Platform for trading
Retail Trader – the broker provides a variety of solutions, which the investor can use to carry out the transaction: by website, phone, mobile phone or program installed on a computer. The platform for installation on a computer is usually additionally paid – unless the trader will reach required level of turnover in a scale of month, and then is a possibility of free platform use.
Prop Trader – usually offered one or few trading platforms, which are installed on a computer. From the trader a fixed monthly fee is charged for platform use. Additionally, investors that use of proptrading companies have a possibility of access to full market depth, so can see a full set of ECNs. This service is, of course, additionally paid. Access to full order sheet is a very good solution, particularly in some trading strategies.
Buying power, size of available capital
Retail Trader – in case of daytrading traders, there are higher capital requirements. It is worthwhile to read SEC & FINRA NASD 2520 RULE, i.e. arrangements as for the size of required deposit for daytrading transaction (min. 25 000$) and its restrictions.
Prop Trader – in proptrading company, the level of available capital depends on the company with which you cooperate, amount of paid deposit and risk management. Companies usually offer 5x, 10x, 20x, 50x or 100x higher capital to trading compared to paid deposit. It is certainly better solution for traders with deposit below 25 k$ or for which trading strategy seems to work at the lowest commissions as provided by proptrading company. In this case, it is necessary to remember that for the access to considerable capital the company charges part of % from obtained profits (dependent on the investor’s company and trading history).
Easy To Borrow List – availability of shorts to open short positions
Both retail as well as prop traders are subject to SEC regulations, so-called Regulation SHO (detailed information about the regulation under this link). Traders must have available shorts at the broker in order to open the short position: i.e. to be on so-called ETB list. The part of companies is possible to locate and lend on short positions, so-called threshold list. Impossible companies to short are on Hard To Borrow list, which are usually updated every 24 hours.
Retail Trader – in case of retail traders, most possible companies to short are on ETB list. It is rare that companies with threshold lists were added on a given day to ETB list. This creates situations when the trader loses a good opportunity for short position.
Prop Trader – proptrading companies, by the fact that they cooperate with large clearing companies, have a considerable advantage over brokers. They have a possibility to locate shorts on companies both before the session and after (in pre- and post-market), but also in session hours.
Trainings, education and development
Retail Trader – brokers usually have a section “education” on their websites, where the most important investment information is collected. Some brokers also organize training/presentations, on which present information about technical or fundamental analysis, but the main aim of such training is to acquire new customers.
Prop Trader – amongst proptrading companies there are such which offer a specific package of trainings for cooperating traders. Above all, such trainings are provided for traders employed in stationary proptrading offices. Some companies also offer online/stationary trainings for remote traders. The difference is that proptrading companies put the main emphasis on practice and use of knowledge from training in real trading (the company also earns on traders profits, so care that traders obtain as the biggest profits).
I hope that above described differences are clear enough to understand it, between the accounts at the broker to cooperation with the proptrading company.