Those looking to break into the day trading industry have a choice to make: do they open an account with a proprietary trading firm – or ‘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 that the products are not exactly the same.

In this article, we will look at the key differences between proprietary trading and retail trading accounts to make comparisons more straightforward.

Fees & Commissions

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 with regards to trading volume or account size. There may also be ancillary fees like inactivity fees or account transfer fees associated with these accounts.

Prop shops tend to be more competitively priced than retail brokers with per share fees that decrease as trading volume increases. The firms may also charge a software or desk fee, although it is typically provided at-cost to day traders. It’s important to inquire about the full fee schedule, however, before setting up an account as they may vary.

Leverage & Buying Power

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. Day traders must also have at least $25,000 in equity to execute more than three day trades in a rolling five-day business period.

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. Often times, buying power increases over time if a trader performs well.

ECN Rebates

Most Electronic Communication Networks (ECNs) provide rebates to traders who add liquidity and 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 out opportunities to add liquidity and collect rebates, which can be a significant source of income and influence order routing.

Education

Retail brokers provide a fair level of educational resources, including training videos, trading seminars, and recommended reading. 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.

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.

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