Before examining what sets these two types of accounts apart, it is first important to develop an understanding of what the difference between them is.
The capital that is traded in a proprietary trading account is typically that of a hedge fund or a brokerage firm. Any trades that are made through this type of account are speculative in their nature. The products traded are typically complex investment vehicles, such as derivatives. Trading activity is limited by both the amount of money that a firm has and a risk manager. Some of the top Proprietary Trading Firm are listed on the link.
Retail trading accounts work much simpler. For instance, a retail trader will choose a broker, then open up an account, and then make a deposit into that. From there, the trader can begin to make trades. Being a customer of the firm and not using their money, there is much more flexibility on the types of trades that can be.
Commissions and fees differences
There are a wide range of fee structures associated with retail brokers and they tend to be highly competitive. Most of the firms out there charge a single flat fee per each and every trade that is made, along with a platform fee. That is unless the day trader meets some specific minimums regarding account size and trading volume. The accounts can also sometimes come with certain ancillary fees, such as account transfer fees and inactivity fees. After all of the commission and fees are collected, the remaining profits are what the trader gets to keep.
A proprietary trading firm is much more competitively priced than retail brokers, in respect to per share fees and trading volumes. The firm may charge a desk or software fee, but that is usually provided at cost to a day trader. With proprietary accounts, the form will take a cut of the profits. This is because it is their own capital being used to perform trades.
Retail brokers give day traders margin accounts which are subject to specific margin requirements and securities rules. For example, Regulation T is in place to limit the leverage used within a retail account. Day traders are also required to hold at least $25,000 worth of equity in order to be able to make in excess of three day trades within a five business day period.
Proprietary firms give traders leverage that is based on the amount of risk capital deposits and the firm’s policies. Any day traders that have less than $25,000 of equity do not need to worry about entry requirements. Over time, their buying power will increase if they perform well.
Retail brokers get access to numerous trading strategies and assets, such as futures, options, and stocks. The issue is that many traders operate without outside resources – this can make it extremely difficult to purchase specific assets or execute certain strategies.
Proprietary firms help traders to identify shares on a threshold list for the purpose of short selling.