Proprietary trading can be quite a speculative and risky industry. Choosing to pursue a career in this business will shake your confidence and it will undoubtedly humble you. Still, every year thousands of professionals choose to move forward and enter this shaky, yet lucrative profession. Also referred to as ‘prop trading’, proprietary trading is when a firm’s traders actively trade stocks, bond, options, commodities, or other items with the firm’s money as opposed to their clients’ money.
While relatively easy to get into, proprietary trading is like any other career; before you jump into becoming a prop trader, you need to conduct a little research to understand the ins and outs of the business. Here’s an overview :
Look for a Firm: Most proprietary trading firms are required by law to have their traders take and pass a Series 7 exam: therefore the first thing you need to do is find a company that will sponsor you. Seek out a prop firm that offerings mentorship and training. Not all firms do. Training and mentorship will be an asset to you once you hit the ground running, and will benefit you in the long-term as well. Another thing to investigate is commission fees. Like anything else, commission fees are negotiable in a contemporary proprietary trading setup. Competition among proprietary firms is fierce, as most traders concentrate on commissions because it is their bread and butter.
You Get What You Give : Most proprietary trading firms require a deposit from you. This deposit goes into your capital account at the firm once you receive your Series 7 and join them. Funds deposited into your capital account are segregated from other traders’ money. This means your deposit is shielded from other traders’ losses. Deposit requirements do vary, with average being in and around $10,000. Why the deposit? Most places will re-affirm that it is to ensure they get serious traders, but in reality, any losses resulting from your trading activities will be taken from your capital account money.
Back to the Books : The next step is … passing your Series 7 exam! Most of the exam covers securities industry rules and regulations as well as basic exchange workings. In addition, you will be tested on basic option pricing valuation. The exam is quite long, so you may want to start studying approximately four weeks before your test is scheduled!
Now What : So, you have successfully completed your Series 7! Time to start working! Proprietary trading firm these days give you the option of either trading from home or in one of their offices. If you choose to trade from home, you will be charged for software fees, in addition to regular commission on your trading activities. However, if you decide to work from one of their offices you will be charged a desk fee on top of your software data fees. This desk fee basically covers costs related to the seat or room you are going to occupy in their trading office.