Remote Proprietary Trading Benefits for Retail Traders

 

Why should you consider remote proprietary trading?

 

Just like in any other business venture, professional private traders need to efficiently allocate their operating capital and minimize their operating costs. By definition, the purpose of remote proprietary trading firms should be to help professional traders in these areas and differentiate themselves from retail brokers.

 

In this post, we’ll explore if and how both self-funded and undercapitalized retail traders could benefit from a remote proprietary trading set-up. In general, there are three categories that retail traders fall into which influence the options of joining a proprietary trading firm:

 

(1) traders with a profitable track record who already have sufficient trading capital in their retail account to get intraday buying power greater than $100,000 for U.S. stocks or trade five or more E-Mini futures contracts

 

(2) traders with a functional strategy but limited trading capital and no verifiable trading history in a real-money account,

 

(3) beginner traders who lack both monetary and intellectual capital to start their trading business.

 

Keep in mind which group you fall into while reading the rest of this post.

 

Futures vs. stocks

First we need to differentiate which product group you intend to trade, because the potential benefits differ greatly between stocks and futures. Since the main reason for considering a prop firm is to provide you with either more buying power than you could get in a retail account or lower trading commissions — or ideally both –, we will compare their offers to the equivalent capital requirements and trading commissions at retail brokers.

The idea is that you would be willing to forgo a certain percentage of your trading profits in return for these benefits. Let’s see how the numbers work out for both futures and stocks.

 

Proprietary futures trading

The most popular remote proprietary trading qualification programs in the futures space include market leader TOPSTEP, Liberty Market Investment, OneUp Trader, and Earn2Trade. Click here for a detailed comparison of the individual firms.

 

Effective trading capital

Since the leverage is built into the product itself in the form of margin requirements, futures prop trading doesn’t really offer any benefit in terms of BP as it is the same as in your retail account.

 

Contract ES | YM | NQ HG CL UB GC
Margin intraday $500 $1050 $1131,25 $1975 $2500
5 contracts $2500 $5250 $5656,25 $9875 $12500
Max. drawdown $2000 $2000 $2000 $2000 $2000
Effective trading capital $4500 $7250 $7656,25 $11875 $14500

 

If you lack adequate start-up capital, however, it could make sense to go through a trading challenges to qualify for an equivalent effective trading capital which ranges between $2,500 and $12,500 plus the maximum drawdown depending on the contract(s) of your choice.

There are many reasons why you should avoid stock index futures, which I will cover in another post, but it seems to make sense to seek a funded account at said futures prop firms to trade products with relatively higher margin requirements such as the crude oil, copper, ultra-bond or gold contracts.

 

Trading commissions

This is another point where futures prop firms fall short in their promise of offering a benefit that would otherwise not be available to retail traders. The trading commissions are equivalent to retail FCMs such as AMP Futures.

You can check AMP’s commission structure here to compare it for yourself.

The only bright spot here is that you can trade with NO commissions in a Funded Account at TOPSTEP using TSTrader® because they essentially pick up the tab for Tradovate’s monthly membership fee.

 

Profit share

On the cost side of the equation are professional market data fees and the sharing of your trading profits with the prop firm. The common profit split for futures is 80%, which is due to CME requirements on member firms taken from CME Group’s Application for International Incentive Program (“IIP”) which include the following:

Traders cannot be responsible for losses beyond their share of profits earned and and maintained in the account which have not yet been distributed to the trader.

The firm must be allocated both a portion of the profits and losses of the IIP firm account.

The profit split on agreements with any trader, including owners acting as traders, may not exceed 80/20 (i.e. 80% to the trader/20% to the firm).

The firm is prohibited from:

Setting minimum account balances for its traders.

Charging margin on positions to traders.

Charging fees on draws taken by traders.

Requiring or accepting security deposits from its traders.

 

Net benefit for futures traders

We can conclude that trader types (1) get no quantifiable benefit in the form of more buying power, while it seems an attractive option for trader types (2) and (3) if they pick commodity over stock index futures.

Since all of the trading firms practically offer the same or worse commissions as retail FCMs, there is also no benefit in terms of operating costs for all trader types.

That leaves trader types (2) and (3) with the question how much qualitative value they get in return for their profit split, which is quite subjective and differs from trader to trader.

 

 

Proprietary stock trading

Let’s see how trading stocks through a prop firm compares to the above scenario.

 

Effective trading capital

In the table below, we see right away that trading stocks intraday is a capital intensive business in a retail account due to the lower margin levels. Especially trader type (1) benefits from a prop account by freeing up “excess capital” in their private trading account which in turn could be allocated to a long-term trading/investment account. In this example, we assume a hypothetical 20% per year which would make the prop account allocation almost pay for itself, so to speak.

 

Account type Retail Prop
Margin intraday 4:1 20:1
Buying power $100000 $100000
Required equity $25000 $5000
Excess capital - $20000
20% return on excess capital - $4000

 

Trader types (2) and (3) would also receive this quantitative benefit of more buying power after qualifying for a prop trading account.

 

Trading commissions

Commissions at retail brokers catering to active traders such as Lightspeed usually start at $0,0035-0,0045 per share or $3,50-4,50 per 1000 shares. At prop trading firms all trader types can benefit from discounted group rates starting around $0,0030 or $3,00 per 1000 shares and going as low as $0,0010 or $1,00 per 1000 shares for highly profitable high volume traders.

 

Account type Retail Prop
Commission per 1000 shares $3,50 $1,50
Trading volume per year 1000000 1000000
Commission per year $35000 $15000
Savings - $20000

 

Profit share

The above benefits of lower commissions and higher buying power come at an expense in the form of a profit split.

 

Account type Retail Prop
Profit split 100% 85%
Net trading profit per year $50000 $50000
Net payout $50000 $42500
Cost - -$7500

 

However, you should note that the profit split for highly profitable high volume traders is not capped like for futures prop traders and approaches 100% over time.

 

Net benefit for stock traders

Using the above assumptions results in a net benefit when comparing prop vs. retail:

 

Account type Prop
Return on excess capital $4000
Commission savings $20000
Gross benefit $24000
Cost -$7500
Net benefit $17500

 

We can conclude that trading U.S. stocks through a proprietary trading firm allows traders to both optimize their allocation of operating capital to short- and long-term accounts and also significantly reduce their arguably biggest operating cost in form of lower trading commissions.

 

How to get into a remote prop firm trading U.S. stocks (for non-U.S. Traders)

 

Now that you have learned about the objective benefits of trading stocks through a remote proprietary trading firm instead of a retail account, it’s time to talk about how you can get there:

 

If you’re trader type (1) with a verifiably profitable track record of 6 months and meet minimum trading volume criteria, trading firms will be happy to take you on and give you the desired buying power after posting a risk-based performance bond to cover ongoing trading expenses such as professional market data, software fees and potential trading losses. Check out the CEED.trader.group for more details to start your application.

If you’re trader type (2) without a verifiably profitable track record but think that you already have what it takes to profitably trade U.S stocks, you may enter one of the Prop Trader Qualifiers (PTQ) through CEED.funding. Your funded buying power is based on your risk-adjusted return in the PTQ.

If you’re trader type (3) and don’t fall into any of the above categories, you may complete the CEED.incubator Prop Trader Trainee Program to learn the mechanics of algo order flow and qualify for professional buying power after successful completion of the program.

 

Please share this post with other traders who may find this information useful and contact us if you have any questions about joining the CEED.trading family.

March 14, 2021

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CEED.trading’s mission is to feed trader intuition based on understanding market microstructure and the constraints of order execution algorithms.

We believe in human traders and that increased systematic trading actually presents an opportunity for hybrid-discretionary traders.

This is why we aim to develop traders in our Prop Trader Trainee program to place them with our partner firm.

Our office is located in the heart of Central Europe in Budapest, Hungary.

CFTC Rule 4.41

Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, because the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown. Testimonials appearing may not be representative of other clients or customers and are not a guarantee of future performance or success.

Risk disclaimer

Futures and forex 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 ones’ financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. This is neither a solicitation nor an offer to buy or sell futures, options or forex. Past performance is not necessarily indicative of future results.

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