Prop trading has become more and more popular during recent years, primarily due to the increase in the number of prop firms that provide trading challenges, funded accounts and education to aspiring prop traders. Nowadays, you don’t necessarily need qualification to make a career out of trading the financial markets. You just need a good trading strategy with sensible money management and investment from a prop firm.
When a business trades on its own behalf in an effort to make money, this is known as proprietary trading. For many years, investment and commercial banks were where most prop trading took place. They had both proprietary trading desks, which traded on behalf of the bank itself, and trading desks that dealt with client money. Billion-dollar profits and, occasionally, billion-dollar losses were generated by these prop desks.
Prop trading desks were discontinued by banks, and the activity merely relocated to new locations. Hedge funds, specialised prop trading companies, and numerous other wealth management companies still engage in prop trading.
Prop trading has become more well-known than ever in recent years because to new proprietary trading firms that are accessible to all traders with an internet connection and a solid trading plan.
Anyone with an internet connection can become a prop trader in the USA. You just need to find a proprietary trading firm that accepts USA traders, complete the signup process and start trading. You can take part in trading challenges, get a funded account and learn more about the financial markets whilst practising your trading strategies.
If you want to take the more traditional route, you could get a bachelor’s degree in finance, business, or mathematics to work as a proprietary trader. Take part in at least one internship with a trading company to gain knowledge of the financial sector and network with professionals. You could then apply for an entry-level position as a proprietary trader.
It really depends on how successful the prop trader is. If they are working for a company, they might be on a fixed wage with some added bonuses if they achieve certain targets. Prop trading firms in the USA can pay an average of $100,000 to skilled traders.
On the other hand, if you are using an online prop firm, then you probably won’t be on a fixed wage, but instead be paid a share of any profits that you generate. The industry average profit share for USA prop firms is around 80-90%.
The short answer is that, unless you work as a trader for one of the big banks, proprietary trading is not illegal. Banks are no longer permitted to engage in proprietary trading as a result of the enormous losses they incurred during the 2008 financial crisis.
The financial crisis demonstrated that the risk management plans in place by investment banks were insufficient. We also discovered just how catastrophic a bank’s failure may be for the entire financial system. Tens of millions of people’s lives were impacted by the results of a few disastrous deals made by a small group of prop traders.
Also, banks were essentially wagering with client deposits on speculative investments and keeping the profits to themselves. The only people who benefited from a prop trader’s significant earnings were the trader and the bank. But, in the event of significant losses, the bank would be forced to make up the difference using client deposits, which are protected by the Federal Deposit Insurance Corporation (FDIC). That means that when transactions fail, as they undoubtedly did in 2008, US taxpayers are responsible.
The Dodd Frank Act was passed in the wake of the financial crisis to avert another collapse of this magnitude. This act included the Volcker Rule, which applied to proprietary trading. 2014 saw the implementation of the Volcker Rule, and banks were given one year to comply fully.
According to the Volcker Rule, banks are not allowed to engage in any proprietary trading or hold ownership stakes in “covered funds” like hedge funds, private equity firms, and some other investment funds.
In essence, the government sought to restrict banks’ ability to engage in any form of speculative activity. Banks are still permitted to engage in some trading operations, such as market making and specific kinds of hedging and brokerage services, but they are not permitted to trade the bank’s funds in any other way.
Five federal agencies—the Securities and Exchange Commission (SEC), Federal Reserve, Federal Deposit Insurance Corporation (FDIC), Commodities Futures Trading Commission (CFTC), and Office of Comptroller of Currency—are responsible for enforcing the Volcker Rule.
Banks are in charge of keeping and reporting thorough compliance logs. They are given a chance to unwind investments and get back into compliance if they break the Volcker Rule.
The Volcker Rule is rarely violated, but when it does, fines are involved. The only sizable fine imposed so far is a $157 million judgement against Deutsche Bank in 2017 for noncompliance.
The big banks have resisted the Volcker Rule in the years since it was implemented, claiming that the cost of compliance is too high and that the prohibition on proprietary trading has made some financial instruments less liquid.
The regulators have somewhat concurred, but the Volcker Rule is still a work in progress that is constantly altered. A relaxation of some Volcker Rule provisions was approved in 2020 by the relevant federal agencies. Banks can now invest in some venture capital funds and credit funds, and more exemptions to what are regarded as covered funds have been allowed.
It depends. Several independent broker-dealers in the US register as broker-dealers with the Securities Exchange Commission and are thereafter subject to SEC regulation. Several join the Financial Industry Regulatory Authority as well (FINRA).
Although FINRA is not a government organisation, any company or person wishing to “conduct securities transactions and business with the investing public in the United States” must register with FINRA. You can check to determine if a specific prop trading firm has registered and is in compliance using the very useful broker check tool provided by FINRA, which holds its members to a rigorous standard of conduct.
Yet, because they are merely trading their own assets and don’t engage with the investing public, many proprietary trading firms can escape FINRA and are subject to little laws.
Although though they operate in US markets, proprietary trading firms situated outside of the US are plainly subject to the regulatory bodies in their home nations, and many of them don’t make an effort to comply with US standards.
Additionally, there are numerous proprietary trading companies that provide “financed accounts” to anyone who can present a solid trading methodology. These companies frequently maintain financed traders on demo accounts, enabling them to also escape regulation.
Prop trading can be a great way to make a living from trading the financial markets from the comfort of your own home., or by applying to work on the trading floor if you have the required experience. There are plenty of prop trading firms in the USA to choose from, some are actually located there whilst others are overseas but can accept prop traders in the USA provided that they meet the legal age requirement.