Advantages of Trading with Prop Trading Firms

I want to discuss the importance of trading with Prop trading firms for day traders. There are several functions the right prop trading firm will offer you. You will be a disadvantage using a regular broker when you want to Day Trade for a living. I am going to use the prop trading firm in the link on the first sentence of this paragraph as my example when it comes to fees. Even if you have the 25k required to day trade you should still consider using a prop trader. They will allow you day trade with only $5,000, but some traders over look the advantages when they have the 25k required. I want to discuss why it is good for everyone seriously considering day trading.

Direct Market Access

This is important due to quantity and order fill time. You can usually get instant fills on large orders using direct market access and everything is up to the millisecond! You can get fast order fills, place level II orders and even get rebates for adding or removing liquidity to the market. That is called rebate trading where you can actually get paid for buying or selling on limit orders. Direct Market Access with also provide you with smart routing systems. You can use several different routes to get your orders filled. Prop trading firms are one of the only ways to get access to smart routing technology. Most brokers will have a standard route they will use and charge you a commission every time you get an order filled which brings me to my next point.

No Commissions

With the prop trading firm listed in the 2 hyper links above they charge no commissions. This is a crucial element that makes them the best deal in the business. They charge a flat monthly fee of $700. So that comes out to be about $35 a day. Now think of this for one second… .I will use Scottrade for my example, you buy 5 stocks and sell 5 stocks…. You are going to pay $70 in commissions to get your orders filled. So that is $350 a week! Almost $20,000 a year vs. a standard $35 a day with unlimited trades. With no commissions you can also scale in and out trades with no additional cost.

Scaling in and out of a trade

Lets say you have 500 shares of GE and you want to shoot for 50 cents locking in profits along the way. The first 10 cent move you sell 100, second 10 cent move sell 100, third 10 cent move you sell 100, fourth 10 cent move you sell 100 and finally on the fifth 10 cent move you are out of your positions. $10 on the first, $20 on the second, $30 on the third, $40 on the fourth and $50 on the fifth, right? So you would be up a total of $150 using a prop trader. With Scottrade you almost could not do this because the trade would only net you a total of $108. What if you had to sell for a loss, now you are down $14 + whatever you lost instead of just whatever you lost. You will be digging your way out of a whole the entire day with commissions.

Buying Power

Buying power is one of the biggest advantages a prop trading firm will give you over an ordinary broker. They will give you 10:1 buying power. So on the initial starting capital required, 5k, you will get $50,000 in buying power. So once you have 10k you get 100k and so on. Even if you start in a slump you lose 1k in 3 days you would still have $40,000 in buying power. A regular broker would only give you 4×1 buying power. So you would have to have 25k in your account to get what a prop trader would give you having only 10k.

Starting capital
Which brings me to my next and final point. Unless you have the 25k needed to day trade you don’t have a choice but to use a prop trading firm. The SEC requires 25k to start day trading so you will need 25k or a prop trading firm. But what happens when you bring the minimum starting capital required to day trade and lose 1k right off the bat…. Guess what? NO MORE DAY TRADING FOR YOU!!! Not until you get the 25k back in your account.

As you can see there are many reasons that a prop trading firm is the way to go. It can save you tons of money in one year of trading and will even allow you to trade with the big dogs with the 10-1 buying power.

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