Retail trading is defined as the ordinary buying and selling of financial assets like currencies, stocks, and commodities by an individual using their personal accounts. So, if you are a Robinhood or Webull trader, you can be defined as a retail trader.
Proprietary trading, on the other hand, is the process where you are part of a bigger trading institution. A good example of this is what we do at Day Trade the World (DTTW). We have our proprietary trading platforms and have thousands of traders globally.
Another example of a proprietary trading firm is Susquehanna, which is a large Wall Street firm that focuses on quantitative and algorithmic trading.
Retail trading vs proprietary trading: differences
There are several differences between retail trading and proprietary trading. First, when you are a retail trader, the buck stops with you. This means that you are responsible for funding your accounts, coming up with strategies, and doing the actual trading.
On the other hand, when you are a proprietary trader, you are working in a systematic place. For example, you will need to follow the trading guidelines offered by the prop firm you are using. At a prop firm like Susquehanna, traders are required to be excellent at algorithmic trading. Similarly, if you are a prop trader at one of DTTW’s floors, you will need to follow the guidelines followed by the floor manager.
Second, as a retail trader, you will need to find your own funds to trade. These funds could be savings or from your salary. On the other hand, as a prop trader, you will mostly be trading funds offered by the company.
At DTTW, we provide our trading floor partners with funds they use to trade. Most prop trading firms do the same.
Third, as a retail trader, you will take your profits 100%. Similarly, when you lose money, you will be accountable to these losses. On the other hand, most prop trading firms have a revenue-sharing agreement with the company. In this, they could be asked to remain with about 70% of the total profits they generate while the company keeps the remainder.
These percentages for traders are much higher at DTTW™.
Fourth, as a retail trader, you are flexible to do what you want. For example, you can decide not to trade for an extended period. This is possible simply because you can the shots. On the other hand, in prop trading, things are relatively structured, meaning that it is more difficult to stay away from the market for a while.
Solo vs team
Finally, in most cases, in prop trading, you will be part of a team while when you are a retail trader you are on your own.
» Related: Team Trading vs Solo Trading
Fees and commissions in retail and prop trading
Trading has become relatively cheaper these days. Trading platforms like Robinhood and Schwab have transitioned to a strategy where they don’t charge a commission. Instead, these companies make their revenue through payment for order flow (PFOF).
This is a situation where they make deals with market makers like Virtu Financial and Citadel. These companies pay them a fee for all order that they process. These funds can be lucrative for the companies. For example, Robinhood generated revenue of more than $958 million in 2020 and more than $1.68 billion in the TTM.
Other types of retail traders have other costs. For example, traders using regular online brokerage companies like OctaFx and ATFX are charged indirectly. While these brokers advertise their free options, they make money using the spread between bid and ask prices. This approach is also relatively lucrative for these brokers.
Meanwhile, prop traders have other types of fees. For example, at DTTW, our traders are not charged a fee when they trade. This is because we have a direct market access (DMA).
Instead, the traders pay a fee in that they don’t take 100% of the profits that they make. This is understandable since they also don’t provide the trading funds.
» Related: DMA vs Retail Trading
Retail trading vs prop trading: how to become?
A common question is on how you can become a retail trader or a prop trader. The process of becoming a retail trader is relatively easier than becoming a prop trader. All you need to do is to create an account with your email address, send verification documents, and then start.
You can do this within a few minutes.
Prop trading is more complicated than that since you will need to go through an onboarding process. In most cases, you will need to provide more information to the company.
Also, you will need to go through a training period. In most cases, the process can take several weeks or even several months. Additionally, if you are running a floor, you will also need to hire and train your traders.
Summary: Why prop trading is better than retail trading
In this article, we have looked at the definitions of prop trading and retail trading. We have also looked at the differences between the two and the best options that you have. We believe that you can be a stable and better trader when you are a prop trader.
We believe that prop trading is a better method of making money in the financial market. It is better because of several reasons. First, if you want to start a trading floor or pit at home, it is the easiest method to do so. It is almost impossible to start such a floor when you are using a regular trading account.
Second, with prop trading, you have a direct market access, meaning that you can decide on how you want to route your trades. At times, some market makers will actually reimburse you with funds when you chose them.
Third, it has scale since many firms give you more money to trade. For example, the average amount in a Robinhood account is about $3,500. With prop trading, you will get much more money than that.
Other benefits of being a prop trader is that there are better prospects for you becoming a full-time trader than when you are a retail trader.
External useful Resources
- 11 differences between prop and retail traders - Trademetria