Prop firm vs broker: pros and cons, fixed costs (pro data), etc.

Georgii

Georgii

Hi all...

I'm looking to possibly expand into stocks, and I'm trying to make up my mind between going to a broker and a prop firm (trading remote with capital deposit). I just wanted to check my info here so far to make sure I'm not missing anything.

Advantages of a broker:

1. Lower, non-professional data fees.
2. No need to pay for and take the Series 56.
3. No profit splits.
4. Platform costs have no markup.
5. You can move your money anytime you want.
6. Lower commissions.
7. Deposit is SPIC insured.
8. Full control of your 'payouts'.

Advantages of a prop firm:

1. Can deposit less money ($5,000 vs $30,000), the remainder of your cash can do something else.
2. With a proven track record can ask for more leverage and have the firm take on some risk.
3. Looks cooler on a resume.

One of the biggest issues I see with the prop firm is that from the few quotes I've gotten, fixed costs for basic, no BS trading of US equities with platform and so on comes to roughly $500 a month, largely thanks to you taking the Series 56 or 7 and being charged pro data rates.

By contrast I could open an account with lightspeed, get the same platform, and be out $110 or less a month (they have rebates for commissions).

It appears the $390 or so in added fixed costs with a prop firm acts as interest on a $25,000 balloon loan (roughly 19% computed annually).

So outside of the possibility of getting more leverage and getting the firm to absorb risk at a potential future date, your main advantage with a remote prop firm is not having to fork over $25,000, but at a respectable cost and with the disadvantage of not being able to move it for a year.

Anything I'm missing? Thanks for all constructive advice...
 
I find the decision often comes down to capital. For equities, if you have enough capital for a portfolio margin account, I believe you are better off running your own business. It also makes it easier to raise capital in the future, as you can show your account to verify your returns. With enough capital, these small differences in Fixed costs are not material. For smaller accounts, where you are trying to make a living from your trading, you will likely require more leverage than you can get on your own.

Bob
 
Georgii - Propfirms have lower commission than brokers...

Also compare the easy to borrow / hard to borrow list.
 
rmorse said:
For equities, if you have enough capital for a portfolio margin account, I believe you are better off running your own business. It also makes it easier to raise capital in the future, as you can show your account to verify your returns.
More...

Thanks Bob, so you mean that if I trade my own account (brokerage), it's easier to verify my track record? I thought the opposite would be true, at a prop firm it would be an independent third party that verifies my information, no?

@ arna, thanks, something to think about!
 
When you open an account in your name or an entity, you own the account and have the ability to show statements and activity to anyone you choose. If you join a BD, you trade in THEIR account, that they have set aside for you to monitor P & L. When you leave, you have no rights. When you are there, you might not even have the right to show it to another party legally without their consent. And, any investor will wonder what advantages were provided to you at the prop firm that you might lose when you leave, including leverage and technology.
 
Very interesting point, Robert. I honestly thought it was the other way around at first. So then it basically comes down to commissions and capital deposit issues.
 
rmorse said:
When you open an account in your name or an entity, you own the account and have the ability to show statements and activity to anyone you choose. If you join a BD, you trade in THEIR account, that they have set aside for you to monitor P & L. When you leave, you have no rights. When you are there, you might not even have the right to show it to another party legally without their consent. And, any investor will wonder what advantages were provided to you at the prop firm that you might lose when you leave, including leverage and technology.
More...

Yep.

I've also found that when/if you decide to make yourself bigger and go the hedge fund route, the people putting money in very well might shake your hand but they'll defer to their counsel for an approval stamp, which usually means an independent audit. No sales pitch can match a multi year independently audited P&L.
 
Georgii said:
Hi all...

I'm looking to possibly expand into stocks, and I'm trying to make up my mind between going to a broker and a prop firm (trading remote with capital deposit). I just wanted to check my info here so far to make sure I'm not missing anything.

Advantages of a broker:

1. Lower, non-professional data fees.
2. No need to pay for and take the Series 56.
3. No profit splits.
4. Platform costs have no markup.
5. You can move your money anytime you want.
6. Lower commissions.
7. Deposit is SPIC insured.
8. Full control of your 'payouts'.

Advantages of a prop firm:

1. Can deposit less money ($5,000 vs $30,000), the remainder of your cash can do something else.
2. With a proven track record can ask for more leverage and have the firm take on some risk.
3. Looks cooler on a resume.

One of the biggest issues I see with the prop firm is that from the few quotes I've gotten, fixed costs for basic, no BS trading of US equities with platform and so on comes to roughly $500 a month, largely thanks to you taking the Series 56 or 7 and being charged pro data rates.

By contrast I could open an account with lightspeed, get the same platform, and be out $110 or less a month (they have rebates for commissions).

It appears the $390 or so in added fixed costs with a prop firm acts as interest on a $25,000 balloon loan (roughly 19% computed annually).

So outside of the possibility of getting more leverage and getting the firm to absorb risk at a potential future date, your main advantage with a remote prop firm is not having to fork over $25,000, but at a respectable cost and with the disadvantage of not being able to move it for a year.

Anything I'm missing? Thanks for all constructive advice...
More...

There are two reasons two consider prop vs broker dealer, 1) leverage ( if one has large enough account then irrelevant) 2) direct access with a prop
 
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