Prop Trading vs. Retail Trading

Retail trading and proprietary trading are two popular day trading strategies in the world today. In this article, we will look at what they mean, their differences, and the best trading approach to use in the market.

What is prop trading?

Prop trading is the shortened version of proprietary trading. It is a relatively small but fast-growing trading approach that involves trading using a company’s money. The popular prop trading firms have the liquidity and the proprietary trading methodology that their traders need to follow. 

In exchange for trading, the trader gets paid a commission for all profits that they generate. This commission is usually a bigger portion of these profits.

By scale, prop trading is not a very big industry since many people tend to doubt whether it works. Also, some people are usually afraid of the initial amount of money that they need to deposit with the providers. However, thanks to the Internet, the industry is growing. Indeed, in the past few years, many firms in the industry have talked about the thousands of people they have taken on.

While many prop trading firms are run differently, there is a common trait. A professional and profitable trader will assess their trading success and hire a trader to replicate this success. Within a few years, the founder will use the internet to expand the business by hiring traders from around the world.

There are many prop trading companies around the world. Some of the popular ones are:

• Day Trade the World (DTTW). This is a Canadian company that is also one of the biggest in the sector. 
• BluFx is a London-headquartered company that charges between £99 and £249 to provide liquidity.
• The 5%ers is a London company that provides between $25,000 and $80,000 to its traders.
• TopStepFx – this one is a prop trading firm that lets its traders access futures and forex.

What is retail trading?

Retail trading is the most popular approach to making money in the financial market. It is the approach that many people use today. For example, every American trader with a Robinhood or Schwab account can be called a retail trader.

A simple definition of retail trading is that it is a process in which a person opens an account with a broker, comes up with a personal trading strategy, and uses their personal funds to trade. In the US, the popular brokers that are common with retail traders are Schwab, TastyWorks, and Schwab, among others. Around the world, among the popular retail trading brokers are companies like FXPro, easyMarkets, and ATFX, among others.

Differences between prop trading and retail trading

So, what are the key differences between being a retail trader and a prop trader? Let’s look at them. 

Prop trading vs. retail trading education

Trading education is an important component of any trading journey. As such, many companies in the trading industry do their best to provide as much education as possible. In fact, all popular trading companies tend to provide as much education as possible.

However, a quick look at the type of education offered by retail and prop trading firms reveals key differences. In general, retail brokers provide basic education that is at times never adequate. That’s because, to them, this education is just complementary to their services. 

On the other hand, prop trading firms offer more advanced knowledge that is in line with the services they offer. For example, a scalping-focused proprietary company will offer training that relates to that sector. The same is true with those firms that offer options trading services.

Prop firms offer in-depth training and mandatory demo account activity because their funds are exposed to market risks. In other words, their success is only tied to the success of their traders.

Direct Market Access (DMA)

Another key difference between prop and retail trading is market access. This mostly applies to companies that offer American shares and ETFs. Retail traders using Robinhood and other popular retail brokers don’t have the so-called direct market access. This simply means that their orders are routed by market makers that they don’t know about. 

Indeed, since these companies don’t charge a commission, they make money using what is known as order flow. These are funds paid by market makers to implement orders. 

Some prop trading firms like DTTW offer their traders direct market access. In this, they can select the right way to route their orders because they have access to the separate market makers. This is advantageous because it allows them to select the market maker that offers the best fee. Also, at times, a market maker can pay the trader some cash as a commission.

Trading funds

Retail trading and prop trading has a difference in the source of funds that are used. As mentioned, in retail trading, people use their own funds, while in prop trading, they use funds provided by the prop firm. This is a major difference since the most common challenge that most traders face is about the source of funds. 

Typically, most of them don’t have enough funds to run a successful trading operation. Therefore, prop firms are better for most traders since they provide the trading funds. 

Reputation

A common difference between the two is that most retail brokers are usually well-known companies that have a long reputation. For example, a company like Schwab has been providing trading services for decades. It also has trillions in assets and a lot of trading tools. Therefore, most traders feel confident about using them. This is in contrast to what many prop trading firms offer. Since most of them are relatively small companies, many traders tend to have limited confidence in them. 

Summary

So, which one would you prefer between prop and retail trading? It depends on the type of trader you are and your goals. As mentioned, the two methods have their pros and cons. However, in my view, I prefer being a prop trader because of the fact that you have more perks, including direct market access and using other people’s cash to trade.