How Prop Traders Are Compensated: Structures and Expectations
Prop trading, short for proprietary trading, is where traders use a firm’s own capital to make market trades. It’s an exciting and profitable career path for anyone with a knack for finance, and it offers opportunities for substantial earnings.
Understanding how traders are compensated in prop trading is pivotal to demystify this field and set realistic expectations.
Proprietary trading firms give skilled traders the capital, technology, and infrastructure they need to trade across various financial markets, including stocks, commodities, and derivatives.
The firms make their money through several business models, each of which is designed to maximise profitability and encourage high performance from traders.
This is the most commonly used revenue model for prop firms. Under this structure, the firm supplies capital for traders to trade, and in return, they share a portion of the profits generated from successful trades.
For example, a trader might be allowed to retain 70%-80% of their earnings, while the firm gets to keep the remaining 20%-30%.
This is an approach that aligns the interests of both the firm and the trader. When the trader succeeds, the firm also benefits – and by incentivising traders to maximise their profits, firms ensure that the interests of all parties are closely linked.
As well as leveraging the profit-sharing model, many prop firms charge fees for their training programs. These programs teach would-be traders the skills they need to succeed in the financial markets, from basic trading strategies to advanced risk management techniques, and more.
Some firms might require traders to pay for this training upfront, but others offer it on a deferred basis, which means they’ll take a cut of profits once the trader becomes successful.
This model is great for helping firms cover operational costs while offering valuable resources to guide and nurture skilled traders.
Some firms use the capital contribution model. This approach requires traders to contribute their own capital, which is then pooled with the firm’s. The trading firm provides the necessary infrastructure and management expertise.
This type of system reduces the firm’s financial risk and forces traders to take responsibility for their trades. In return, traders can typically access higher amounts of leverage and keep more of their profits.
Prop firms use different compensation models to reward traders for their performance. The structure used reflects various factors, such as the firm’s philosophy, resources, and the trader’s experience level.
Here are some of the most common models:
Certain prop firms provide a base salary plus a share of the profits traders generate. This structure ensures traders’ financial security while incentivising them to achieve high returns. For example, a trader might earn a modest base salary of £40,000 annually and 10%-20% of the profits they bring in.
Under this structure, traders are compensated entirely for their share of the profits. This model carries more risk for the trader, but it also offers uncapped earning potential. For instance, traders might keep 50%-80% of the profits they generate. This structure appeals to highly skilled and confident traders, as earnings are directly tied to performance.
A commission-based compensation model rewards traders with a percentage of their profits, typically split between the trader and the firm. For instance, a trader might receive 70% of the profits while the firm retains 30%. This system provides a clear and straightforward incentive for high performance.
Experienced and high-performing traders may be offered equity in the firm or invited to become partners. This model provides long-term incentives, as traders share company-wide profits beyond their performance. Equity participation is typically reserved for senior traders contributing to the firm’s strategic direction.
In some firms, traders are paid a fixed salary alongside performance-based bonuses at specific intervals, such as quarterly or annually. For example, a trader might earn £50,000 annually with a bonus structure that rewards top-performing traders with up to £30,000 in bonuses. This model provides a balance of stability and reward for success.
Prop firms provide traders with firm capital (leverage) to trade more prominent positions than they could with personal funds. Compensation under this model depends on the trader’s ability to generate profits with the provided capital. For instance, a trader might manage £1 million in firm capital, keeping 20% of the profits while the firm retains the rest.
Earnings in prop trading can vary widely depending on factors such as a trader’s experience, performance, and the compensation model employed by the firm.
For entry-level traders, the salary is generally lower as they are still honing their skills and gaining experience.
On average, beginner traders carn between £25,000 and £50,000 annually. This base salary is often supplemented by performance-based bonuses or profit-sharing, which can increase overall earnings.
Important note: Many beginner traders face a steep learning curve, and their earnings are often modest compared to those of their more experienced counterparts. Nonetheless, for a new trader, even with the potential for bonuses, this salary offers a stable income while they build their expertise and track record in the markets.
The good news is that with a few years of experience, traders can expect to see significant growth in their earnings, thanks to the accumulation of skills, strategies, and market knowledge.
Intermediate traders, who may have between two to five years of experience, can earn between £70,000 and £150,000 annually.
Most of this income typically comes from profit-sharing and bonuses, which reward traders for successful trading. At this stage, traders are often more confident in their ability to generate consistent profits, and their compensation reflects their higher skill level and track record.
Highly skilled traders who have mastered complex strategies and achieved consistent success in the market can earn significantly more.
Advanced traders, with many years of experience and a solid reputation in the industry, can expect to earn £200,000 or more annually. For top-tier traders at leading firms, the earning potential is even more significant, with some surpassing seven figures per year, mainly when they generate large profits.
At this level, traders are often given access to higher capital and leverage, allowing them to make larger trades and earn more substantial commissions.
Note: These earnings are highly variable and depend on several factors, including the trader’s skill level, market conditions, and the firm’s compensation structure. Earnings can fluctuate, and traders must consistently perform well to achieve higher compensation.
While prop trading offers the potential for high earnings, it’s not a guaranteed path to wealth. Common misconceptions, such as overnight success, can lead to disappointment.
Key considerations for setting realistic expectations:
Prop trading is a lucrative career path for those who excel in financial markets. The industry offers diverse compensation structures to match traders’ skills and risk tolerance, from base salaries to profit-sharing and equity models. It provides opportunities for financial growth and career advancement.
Success in this arena demands dedication, realistic expectations, and a long-term commitment to honing one’s craft.