Proprietary Trading Firms - Dirty Secrets Exposed!

If you have any experience intraday trading with a prop shop or prop firm, you know there are upstanding reputable firms as well as some firms from which you should run screaming and yelling. Here are some things we have heard from our TUI Prop Traders about what the other proprietary firms don't want you to know . . .

The Up Front Buy In Fees

Believe it or not, there are many proprietary trading firms who will charge a substantial "buy-in" fee just for you to start day trading with them. They may also require additional capital risk deposit. Usually the buy-in fee benefits the prop firm, not the trader, as it goes directly towards the firm's profits.

Mandatory Educational Fees

There are firms which offer solid training on how to day trade, however many get away with charging 10's of thousands of dollars (YES! more than $10K!!!) for substandard classes. It is left up to the unwary day trader to figure out which firms are worth their hard earned cash. If you are considering one of these firms, ask to talk to people who have gone through the program and get as many statistics as you can on the firm's retention rate. There are many free resources on the web which can give you a solid foundation in understanding technical analysis, so check those out too.

Fees, Fees, Fees! Software Fees, ECN Fees, Ticket Fees & Seat Fees

Don't be shocked, just about every proprietary trading firm will bill you for a level II direct access software fee. They in turn pay a license fee to the software developer for every trader on their floor. This is a legitimate fee associated with being a professional day trader.

Another legitimate fee is the ECN fee. The proprietary trading firm has no control over these fees. However, if you make a habit of adding liquidity when you trade, you are entitled to the ECN rebates. Some prop shops will want a cut of this rebate while others allow you to keep the full rebate. Hmmmm, let's see, do you want to keep all your rebates or give some of it away?

Another notorious way for prop firms to make money are ticket fees and seat fees. These fees are above and beyond your commission and software fees. Look for a proprietary trading firm which does not charge these fees. Why pay more when you don't have to?

Payouts

Proprietary trading firms are required by law to retain a percentage of a trader's profits. This is because the firm provides leverage or buying power to the trader using its own capital. The amount the trader keeps varies, depending on their initial capital deposit, experience and risk management strategy.

Buying Power & Volume Requirements

The lure of oodles of dollars in buying power (BP) is irresistible to day traders. You know the more stock you can buy, the higher your potential profits. Most traders don't recognize the opposite is true as well. A responsible proprietary trading firm which is vested in the longevity of its traders will start a trader off on a standard BP based on their capital deposit of around 7:1. As the trader grows with them the firm will increase their trader's BP.

Many prop shops focus on the short term gains of giving a trader a large BP. The more shares the trader does, the more commissions the proprietary trading firm makes. They may even have volume requirements in place forcing the trader to take positions beyond their comfort level. Stay far, far away from firms with volume requirements, they do not have your best interest in mind.

Conclusion

Now you know a bit more about how to go about choosing a proprietary trading firm with which to trade. It may take a lot of searching, but keep at it and you will find what you are looking for. Here is some more information on how to find and choose a proprietary trading firm.