The traditional model of trading sees the investor working with a self-funded broker trading account. They are responsible for managing their trading schedule, activities and outcomes, and work completely autonomously.  

Recently, a newer model of trading is gaining in popularity. This is known as proprietary trading, or prop trading for short, and offers traders attractive advantages. In exchange, traders must agree to a more controlled trading environment.  

For those who’ve been wondering what the fuss over prop trading is about, and how different it is from traditional broker trading, this article has got you covered. We’ll explain everything you need to know about both forms of trading, so you can decide which one is better for you. 

Overview of Broker Trading 

Broker trading is the form of trading that perhaps most traders are familiar with. It simply involves signing for a trading account with a reputable online broker to trade the markets you’re interested in.  

Broker trading accounts are self-funded, and the trader is responsible for keeping the account in good standing. This involves ensuring the required level of funds is maintained at all times – including, most importantly, a margin call (if leverage is used).  

Additionally, the trader must manage their own trading budget, and is limited to working with the account size they have, no matter how small or large.  

Broker trading is highly independent, with the trader having the freedom to determine their trading activities and schedule. This includes selecting their own trading targets, and amount of loss they are willing to bear.  

To sum up, broker traders are solely responsible for their own trading outcomes, and there’s a lot of freedom to experiment and find and develop their own trading style. However, broker trading may pose a barrier to success – as we’ll discuss later on in the article.  

Overview of Prop Trading 

Proprietary trading, commonly known as prop trading, is an arrangement in which traders use capital provided by a proprietary trading firm rather than relying entirely on their own funds.

In return, traders may receive a share of any trading profits they generate. The profit-sharing arrangement varies between firms and may depend on factors such as the account type, funding level, and programme structure.

However, traders are not usually given access to funded accounts immediately. Most prop trading firms require applicants to complete an assessment or challenge designed to evaluate their trading ability, consistency, and risk management.

These assessments are commonly conducted using simulated funds under live market conditions. Traders may be required to meet a specified profit target while remaining within daily and overall loss limits. Some firms divide the assessment into multiple stages, with each stage testing different aspects of the trader’s performance.

Failing to meet the required conditions or exceeding the stated loss limits may result in the trader failing the assessment. Traders who successfully complete the required stages may qualify for a funded account and become eligible to receive an agreed share of their trading profits.

Funded traders must continue to follow the firm’s trading and risk management rules. Breaching these conditions may result in restrictions or the closure of the funded account.

The structured rules and performance requirements associated with prop trading may not suit every trader, particularly those who prefer greater flexibility when testing strategies. Traders should carefully review a firm’s assessment criteria, fees, profit-sharing terms, and risk limits before participating.

One of the main potential advantages of prop trading is access to a larger amount of trading capital than a trader may otherwise have available. We will explore this further in the next section.

The Key Difference Between Broker and Prop Trading  

It’s a fact that the larger capital you have to trade with, the larger your returns can be. Trading with a small account undeniably limits your returns. You also cannot take positions that are too large, as losses can pose a significant setback to your trading goal.  

Conversely, a larger trading budget makes it easier to reap meaningful profits and enable your account to grow at a faster rate. And provided proper risk management is practised, losing trades are less impactful to your account balance. 

Now, one of the biggest barriers faced by many broker traders is the lack of capital. This is because they are limited to whatever amount they can set aside for trading, which may come from their income or savings.  

With a smaller trading account, growing your trading capital will be slow at the start. It would take considerable time, effort and discipline to get to where you want to be. 

Prop trading removes this barrier through the provision of funded accounts, often at six figures, or a range that most average traders find difficult to come up with on their own. Hence, prop trading offers traders a way to jumpstart their trading careers, potentially accelerating their returns.  

Comparison of Brokers and Prop Trading Firms 

While having access to a funded account may seem attractive to some, it does not automatically make prop trading the superior choice. It’s important to compare both forms of trading in their entirety. 

The Benefits of Broker Trading  

As outlined in the table above, broker trading offers more freedom and flexibility. Traders are allowed to determine their own profit targets, and do not have a loss limit imposed on them. This leaves room for higher risk, which may allow more strategies.  

Of course, a reasonable loss limit must still be established, with proper risk management implemented. This is to avoid overly large losses that are difficult to swallow, leading to revenge trading in a misguided attempt to recoup losses or turn a losing position around.  

Because broker trading is self-funded, traders get to keep 100% of any profits they generate, less applicable fees and charges. The risk of account is comparatively low, as long as funding requirements are maintained.  

The Benefits of Prop Trading  

For prop trading, the most obvious benefit is the ability to trade with a funded account, which removes a major barrier for many traders, as discussed previously. But there are also more benefits in store for a dedicated prop trader.  

While prop trading is bound by more rules, this isn’t automatically a disadvantage. Think of the profit targets and loss limits as guideposts that create a structured environment to trading.  

This elicits a disciplined approach from the prop trader, who may find such controlled conditions beneficial in developing good trading habits, helping them to build a solid foundation while honing skills and strategies that work.  

Prop traders do have to share their profits with the prop firm, but this is a worthy sacrifice considering the myriad benefits enjoyed. Besides, leading programmes like Vantage Elite offer a profit sharing of 80%, which means our prop traders keep a large majority of their profits.  

Conclusion: Is broker trading or prop trading better for you? 

Hopefully we’ve given you enough details to determine whether broker trading or prop trading is more suitable for you.  

No matter which you choose, it’s important to sign up with a reputable trading firm that is truly invested in your success. Afterall, trading can be a lifelong endeavour if you find the right partner that provides the platform, tools and support you need.