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Proprietary trading is a unique market in which trades are made using the money of the firm, rather than money from investors. Proprietary day traders are typically paid according to how much money they make for the firm, rather than being offered a base salary. The profits are split at varying levels of compensation for the trader and there are many different structures with a variety of incentives and returns.

As those with experience of the industry such as Lenn Mayhew Lewis know all too well, there are many advantages and disadvantages to proprietary trading, depending on the firm, the success of the trader and the markets or types of trade they specialise in.

Pros of Proprietary Day Trading

There are many positive aspects to proprietary day trading for the right candidates. One of the biggest is that these traders are granted access to higher levels of trading capital than they would have were they to work for themselves. These extended leverage positions mean the trader can take large market positions which, if successful, result in larger profits for the trader as well as profits for the company.

The commissions for proprietary traders are typically far lower than those for retail traders, meaning the costs of trading are reduced when compared to what a trader can make working from home. Working for a proprietary trading firm has the added advantage of interaction with other professional traders, facilitating the exchange of knowledge and access to training. This can also develop a feeling of community leading to increased job satisfaction.

Cons of Proprietary Day Trading

There are some potential downsides to choosing proprietary day trading as a career. There is little job security, as firms will only keep on those traders that are consistently profitable. Accounting for losses can also be a big stress factor, taxing individuals emotionally. There are often fees that the trader must pay for training or for essentially hiring a seat on the trading floor which can prove cost-prohibitive, especially for those just starting out.

Traders are also likely to have to hand over a percentage of the profits they make to the firm, which means some traders may be better off working independently. Furthermore, the shift towards online trading means that there are fewer opportunities for working from the trading floor, which removes some of the advantages outlined above.

Proprietary Firm Structure

There are two main structures for proprietary trading firms. In the first, which is the most popular in the US, the trader keeps between 90% and 100% of the profits they make. However, in exchange for this and access to the leverage of the company, they are required to put in a certain amount of capital of their own to act as a risk buffer for the company. The trader will usually also be liable for various fees payable to the company such as training fees, seat fees, software fees and higher commissions, as this is where the company makes its money. In the second model, the trader pays a larger cut of the profits to the firm, between 20% and 50%, but will have fewer outgoings in terms of putting up capital, renting seats or paying for software.