Day Traders: Retail vs. Prop Trading Accounts (2024)

Even if you aren't an active trader, there's a good chance you have some exposure to the stock market. In fact, almost everyone does. It may be through mutual funds or your IRA. But what if you want to turn that passive trading into an active strategy? If you want to be an active trader in individual stocks, you really only have two general paths: Become a professional trader (prop trader) or trade in a retail account.

Those looking to break into the day trading industry have a choice to make: open an account with a proprietary trading firm—also known as a"prop shop"—or one with a retail online broker? When evaluating account options, independent day traders often compare costs and account features but fail to realize the products are not exactly the same.

Key Takeaways

  • Active traders in individual stocks have two general paths: become a professional trader (prop trader) or trade in a retail account.
  • Capital traded in a prop trading account is usually that of a brokerage firm or hedge fund,trades are typically speculative in nature, and traded products are usually derivatives or other complex investments.
  • Retail trading accounts are much simpler, as a trader chooses a broker, opens an account, and starts making trades.
  • Retail brokers provide day traders with margin accounts subject to certain margin requirements and securities regulations, whereas prop shops provide traders with leverage based on the risk capital deposited and the firm’s policies.

Retail vs. Prop Trading

The capital that's traded in a prop trading account is usually that of a brokerage firm or hedge fund. Trades made through this account are typically speculative in nature. Products traded are usually derivatives or other complex investment vehicles. Trading activity is usually limited by a risk manager and by the amount of money a firm has.

Retail trading accounts, on the other hand, are much simpler. A retail trader will choose a broker, open up an account and make a deposit. After that, the trader can simply start making trades. Since you are a customer of the firm and you're using your own cash rather than that of a firm, there's far more flexibility on what trading activity you can undertake as well as how and when you can do it.

Fees and Commissions Differences

Retail brokers have a wide range of fee structures that tend to be very competitive. Most firms charge a flat per-trade commission along with a platform fee unless day traders meet certain minimums when it comes to trading volume or account size. These accounts may also come with ancillary fees like inactivity fees or account transfer fees. After the fees and commissions are all collected, the profits from your successful trades are yours to keep.

Nowadays, retail brokers offer commission-free trades for stock shares. This makes them more competitively priced than prop firms which often still charge per-share fees. The firms may also charge a software or desk fee—although it is typically provided at cost to day traders. With prop accounts, remember that the firm will likely take a portion of your profits. After all, you are trading the firm's capital and not your own.

Either way, remember to inquire about the full fee schedule because they do vary. Knowing how much you'll have to pay is an important part of opening and setting up your account.

Comparing Leverage

Retail brokers provide day traders with margin accounts that are subject to certain margin requirements and securities regulations. For example, Regulation T may limit the amount of leverage used in a retail account. The pattern day trader rule prohibits traders from executing more than three intraday trades in a rolling five-day business period unless their account is larger than $25,000 in equity.

Prop shops provide traders with leverage based on the risk capital deposited and the firm’s own policies. Day traders with less than $25,000 don’t have to worry about minimum equity requirements and others have access to more capital than they would with a retail account. Buying power often increases over time if a trader performs well.

Taking Advantage of ECN Rebates

Most Electronic Communication Networks (ECNs) provide rebates to traders who add liquidity and they also charge higher fees to traders that remove liquidity from the market. Retail brokers generally don’t pass on these rebates to day traders since they route orders to the lowest cost destinations.

Prop shops enable day traders to take advantage of ECN rebates as a trading strategy. In fact, day traders may seek opportunities to add liquidity and collect rebates—all of which can be a significant source of income and influence order routing.

Comparing Educational Resources

Retail brokers provide agood level of educational resources, including training videos, trading seminars, visual media, and articles. These resources are designed to help traders understand the market and ultimately increase their trading volume.

Prop shops have much more incentive to educate traders since their own capital is at stake. In general, the training provided by these firms is much more hands on and valuable. Traders should be cautious, however, with firms that charge upfront for training services.

Licensing the Account

One of the main differences between the two accounts is whether you require a license to trade. Professional trading requires licensing, which means the people making trades on your behalf—or you, if you're a prop trader—may be required to obtain a securities license for a prop trading account. On the other hand, retail accounts don't require any training or paperwork. That's because you're trading your own capital. This is one key benefit of using a retail trading account.

Other Considerations

Retail brokers provide basic access to many assets and trading strategies such as stocks, options, and futures. The problem is that traders operate without outside resources, which can make it difficult to buy certain assets or execute certain strategies.

Prop shops can help traders identify shares on a threshold list for short selling, access liquidity in dark pools and access buying power to execute on more opportunities. These account features can provide a big advantage over the long run.

The Bottom Line

Most day traders begin with retail brokers due to their popularity, but ignoring prop shops can be a costly mistake in the long run. Prop trading accounts at firms such as T3 Live, Avatar Securities, Assent LLC, and Hold Brokers may be attractive options for some day traders. It’s important to carefully consider these differences when deciding between retail and prop trading accounts.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.

Day Traders: Retail vs. Prop Trading Accounts (2024)

FAQs

Day Traders: Retail vs. Prop Trading Accounts? ›

Nowadays, retail brokers offer commission-free trades for stock shares. This makes them more competitively priced than prop firms which often still charge per-share fees. The firms may also charge a software or desk fee—although it is typically provided at cost to day traders.

What type of account do day traders use? ›

Day trading refers to a trading strategy where an individual buys and sells (or sells and buys) the same security in a margin account on the same day in an attempt to profit from small movements in the price of the security.

Are prop accounts worth it? ›

Is working with a prop firm worth it? There are many unique advantages that make working with a prop firm worth it. These include access to unique software and information, trading with the firm's capital, and cashing in a large portion of your winnings.

What is the difference between a retail trader and a prop trader? ›

The key difference between retail trading and proprietary trading is that a retail trader trades with their own funds, while a prop trader trades with the funds of a company which specifically hired such a person to capitalize on the firm's assets and make even more money.

What is the difference between a retail account and a professional trading account? ›

Retail traders typically have limited funds available for trading, which can limit the size and scope of their trades. Professional traders, on the other hand, may have access to significant amounts of capital, allowing them to execute larger trades and take on greater risks.

How much money do day traders with $10 0000 accounts make per day on average? ›

Profit Margins: Day traders' results largely depend on the amount of capital they can risk and their skill at managing that money. With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers.

What is the best account to open for day trading? ›

Best brokers for day trading
  • Interactive Brokers.
  • E*TRADE.
  • Fidelity.
  • Webull.
  • Robinhood.
  • TradeStation.

Are prop traders considered professional? ›

Professional trading requires licensing, which means the people making trades on your behalf—or you, if you're a prop trader—may be required to obtain a securities license for a prop trading account. On the other hand, retail accounts don't require any training or paperwork.

Do prop firms actually trade? ›

Proprietary (prop) trading firms are legitimate entities engaged in trading with their own capital or funds provided by traders. Their legitimacy depends on regulatory compliance, transparency, capital requirements, education and support, profit-sharing terms, risk management, and their reputation.

Do prop traders need a license? ›

Prop trading firms are less heavily regulated than regular brokerages and broker-dealers. However, it depends on the way the prof firm choose to open their business. If them choose to open a firm only with trader challenges, there's no license needed.

Can retail traders really make money? ›

Retail traders can make money if they discipline themselves to learn a specific trading style and use risk management techniques. It isn't easy to make money consistently as a trader, but it's possible.

Are retail traders profitable? ›

The profitability of average retail traders in Forex, stocks, and other financial markets varies. Success depends on factors like strategy, risk management, and market conditions. While some traders achieve profits, others may experience losses.

How much does the average prop trader make? ›

Proprietary trader salaries typically range between $60,000 and $165,000 yearly. The average hourly rate for proprietary traders is $48.09 per hour. Proprietary trader salary is impacted by location, education, and experience.

Which account type is best for trading? ›

Standard Accounts

A standard account is the most popular type of forex account, with many experienced or institutional traders preferring it over the others. The typical lot size of this account is 100,000 units of the base currency. However, you don't need $100,000 worth of capital to open and close positions.

What are the 3 accounts for trading? ›

3-in-1 (savings, demat and trading) account - The 3-in-1 (savings, demat and trading) account is a combination of Demat, Trading and Savings Account. Demat account – A demat account helps investors hold shares and securities in an electronic format.

Does day trading require a license? ›

There are no explicit requirements for becoming a day trader, but a technical and expansive knowledge of how financial markets work, as well as a comfort with electronic trading platforms, and the rules and regulations of trading is essential.

Do day traders use cash accounts? ›

One can day trade as often as one wishes in a cash account. The caveat however, again as noted above, is cash accounts require a 2 day settle time for proceeds from sales. One can buy and sell the same stock in a day, but one will not have immediate funds from that sale to buy again for 2 days.

Which bank account is best for traders? ›

So in our list of the best banks to open a demat account with, we have:
  • ICICI Direct.
  • HDFC Securities.
  • Kotak Securities.
  • Axis Direct.
  • SBI Securities.
  • IDBI Direct.
  • PNB Demat.

What is the 3 5 7 rule in trading? ›

What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.

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