High Frequency Trading Firms

High Frequency Trading Firms mean NYSE empty desks

NYSE empty desks—serenitbee (Flickr.com)

High Frequency trading isn’t for everyone. But for those of you looking to become a high frequency trader, you may not know where to begin. You’ve looked into the risks and rewards in the career of trading and decided that you want to take your destiny into your own hands. This is a great first step, but this isn’t something you can do entirely on your own. Like any other business, you are dependent on doing business with other professionals, particularly when it comes to infrastructure. This means choosing things like the software you will trade from, the computer setup, the location of the set up, who you trade with, the costs and rewards of the infrastructure, and more.

In short, you need to choose a trading firm.

This is a great next step toward becoming a high frequency trader, but this is also a question that may come up time and time again throughout your trading career. Trading firms come and go as fast as the markets they trade rise and fall. As well, when there is increased competition, traders may find themselves leaving one place for another in order to obtain a better deal.

When comparing high frequency trading firms, you should first decide if you want to trade retail or proprietary. The main differences between the two are:

The Pros of Retail High Frequency Trading Firms

Higher payout. If you trade retail you get to keep everything that you make without profit sharing.
Personalized set up and software. Although not all retail brokers support all software, there are no limitations as to what software you can use and download on your computer.

Trade any market any hours – If you are trading retail, you can trade multiple markets and various times.

More Freedom– Freedom is a big one for traders. After all, freedom is one of the prime reasons people go into trading. Freedom can mean choice of software, equipment, risk reward parameters, and even attire. Heck, you can even trade in your underwear if you are trading remotely.

You learn more from yourself and less from others – this is a pro and a con, since it depends who you are learning from

Nasdaq Take 2

Nasdaq Take 2—bfishadow (Flickr.com)

The Cons of Retail High Frequency Trading Firms

Higher fees and lower rebates – Retail firms make their money from transactions, not from profitable traders. This means that they will generally have higher transaction fees. The higher the frequency of your trading, the more this will effect your profit.

Lower levels of support – Retail firms offer a less personalized form of support for their clients, and are often less empathetic towards concerns of traders.

You only learn from yourself – A mentor relationship is less likely in retail, as well as the friendship and ideas sharing found within tight prop firms.

Higher Captial Requirement – Retail firms treat each trader as an individual client. This means that you will be subjected to regulatory rules regarding trading capital. As well, retail firms are less likely to treat a trader as an individual during their risk management, meaning your trading performance will not affect or increase your trading leverage in the market.

The Pros High Frequency Trading Prop Firms

Lower fees – High Frequency trading prop firms tend to make money when their traders make money so they don’t need to charge as much for transaction fees. This means that they can gain an advantage over retail firms by allowing higher frequency trading styles that may not be profitable in a retail environment.

Higher Rebates – Sometimes prop firms receive bonuses from ecns and market exchanges for high volume levels. They then pass this rebate on to the trader, which in turns entices the trader to trade more often through their exchange.

Lower cost to entry – Unlike Forex, stock market traders in the USA need to come up with a minimum of $25,000 to trade the U.S Markets, then they need to pay for all the software and fees associated with setting up a trading station. When you join a Prop firm the infrastructure is already there and they may have a way of putting up the $25,000 for you.

Mentorship – One of the best ways to learn anything is one on one teaching. A good mentor could be the difference between learning to trade for a living and failure. Although retail traders can still seek out mentors to learn from, an in-house hands on mentor you see day to day is a completely different experience.

Shared Learning – Even if your high frequency trading proprietary firm doesn’t offer a Mentorship program, you can still receive great experience from the other traders in your group. You will be able to learn from professionals and amateurs alike that expose you to a wealth of fresh ideas and motivation.

Higher Leverage – One of the biggest factors for choosing a high frequency trading firm is how much leverage you can get. Here prop wins hands down. Proprietary trading firms look at traders and make risk assessments on them as an individual person with strengths and weaknesses and often increase leverage in tandem with your trading performance.

Street Signs from HFT Trading Firms

Ftse, stock market—401 K 2012 (Flickr.com)

The Cons of High Frequency Trading Prop Firms

Lower Payout – Prop firms take a cut of all your profits as a trade off for their training and investment in infrastructure.

Less Freedom – You may find yourself restricted to in house software and equipment. As well, depending on your firm, you may not be able to set your own hours. Prop firms are like a cross between a job and a business and often it is they who wield the power in the relationship. Prop firms may also have security set ups that prevent you from using certain market tools and other help from outside the firm.

Both retail and proprietary high frequency trading firms have their advantages, and a lot of them have tendency to overlap into the others realm. For example, retail trading firms may get large enough to offer prop style fees, whereas prop trading firms may be able to offer remote trading from your home and online support via the internet. Generally speaking, beginner high frequency traders do better in a prop trading environment because their investment at this stage is time, whereas the advantages of retail high frequency trading firms come more from the trader’s ability to invest capital.

When comparing retail and prop trading firms in any field you will want to look at payout, leverage, freedom, learning opportunities, transaction fees, rebates, software, infrastructure, available high frequency trading models, and anything else that will affect your profitability as a trader.

Once you determine where you are in your trading career and what you want, you’ll know how to choose among the best of the best high frequency trading firms.