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|
|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.
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.
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.
|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.
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.
|Commission per 1000 shares||$3,50||$1,50|
|Trading volume per year||1000000||1000000|
|Commission per year||$35000||$15000|
The above benefits of lower commissions and higher buying power come at an expense in the form of a profit split.
|Net trading profit per year||$50000||$50000|
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:
|Return on excess capital||$4000|
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.