Don’t Miss These 3 Main Disadvantages of Prop Trading Firms

Many traders are attracted to the seemingly endless buying power and associated unlimited profit potential promised by futures and stock prop trading firms. If it sound too good to be true, it usually is. So what’s the catch here? Let’s explore the major disadvantages of prop trading.

There are three categories that may influence your overall eranings potential when going for a prop firm that need to be evaluated carefully. Among many other potential factors, the main disadvantages of prop trading arise from being classified as a market professional, unfavorable profit sharing, and whether your net trading profits are taxed as capital gains or ordinary personal income.

Who is considered a market professional?

When trading other people’s money, you’re generally considered a market professional by the exchanges. This can have costly consequences and significantly, and often unnecessarily, increase the fixed costs of your trading business.

Especially new traders will find this a steep hill to climb at the beginning of every month. Look at the breakdown of various fees and tax considerations below for potential savings of staying non-pro.

Market data fees

Being classified as a market professional comes at a steep cost. If you want to trade US stocks, basic Level 1 professional data for NYSE and Nasdaq will cost you $96.60/month and quickly go beyond $100 if you add Level 2 data or extra ECNs. 

For futures traders, on the other hand, the CME Group has a special treat waiting for professional taders as it still refuses to pass on the the benfits of its merger synergies to end users. Each exchange will set you back $135 per month (it’s Level 2 data for pro). For multi-asset traders this is a whopping $545 just for market data at the CME, CBOT, NYMEX and COMEX.

 

Alternative: stay non-pro and pay less than $10/month for US stock Level 1 data (NYSE+Nasdaq). As of January 1, 2024, futures traders pay $10 for Top-of-Book Level 1 data for all 4 exchanges that are part of the CME Group. The group bundle for Level 2 data comes at a monthly cost of $39.

Potential savings: $86/month for stock traders requiring only Level 1 data and up to $535 for futures traders because Level 1 only is not available for pro subscribers

Software fees

Many equity prop firms only offer Sterling Trader Pro or Sterling LST to their traders, which can set you back anywhere between $150-280/month depending on your broker. Software rebates are usually only offered for significant trading volume.

In general futures prop traders have a broader range of product offerings to choose from with cost ranging from zero up to $80 per month. The majority of remote prop trading firms offers connectivity through the Rithmic data feed with a dedicated platform at no cost.

Alternative: stay non-pro and trade through our preferred broker Alaric Securities. They also offer Sterling Pro for $150 but their excellent in-house platform HAMMER is priced at $29.95/month with arguably better charting. The Hammer Lite version even offers zero commission trading with no software fee.

For futures traders there is no significant diffence between pro and non-pro pricing.

Potential savings: $120-250/month for stock traders

Profit share

In return for offering higher buying power, equity prop firms keep anywhere from 10-40% of your profits. On the futures side the going rate is from 10-20% of trading profits. If you don’t need hand holding from a prop firm anymore, you should seek out brokers offering equivalent leverage without the dreaded profit share agreement: