As a prop trader you’re in a performance and skill based environment where you trade the firm’s money. Unlike traditional traders you don’t trade for clients so you have more freedom in strategy and execution. But this unique trading paradigm comes with its own set of fees that can eat into your profits.
You need to know the fees and costs of prop trading to manage your expectations and your P&L.
Prop trading firms provide you with the capital to trade but also charge you various fees that can include spreads, commissions and monthly access fees. These are the base fees that will eat into your trading profits and you need to understand how they work.
For example spreads and commissions can vary greatly across firms and directly impact your trading performance. And additional costs such as platform fees, software subscriptions and even educational resource expenses may apply.
Knowing these fees will not only help you decide which firm to trade with but also help you develop strategies to navigate and minimize costs. Being aware of the financial mechanics of the prop trading world will set you up for a more measured approach to your trading career.
Trading Account Fees
As a prop trader you should be aware of the various trading account fees that can affect your P&L. These fees are non negotiable and part of trading so you need to know them.
Commission Fees
Commission fees are charges by brokers or prop firms each time you trade. For example a firm might charge $9 per 1 standard lot traded which is billed when you open a position. These fees can vary across firms and should be added to the cost of trading.
Spread Costs
Spread is the difference between the buy (bid) and sell (ask) price of a financial instrument. Prop firms tout tight spreads to attract traders; for major FX pairs you might see spreads from 0.4 to 0.9 pip on average. The lower the spread the less you pay and that can add up to a lot especially when trading large volumes.
Overnight Financing or Swap Rates
If you hold a position overnight you will incur swap rates or overnight financing fees. These fees or credits are based on the interest rate differential of the traded currencies. If the interest rate of the currency you bought is higher than the interest rate of the currency you sold you get credits and if it’s lower you pay fees. Firms collect these swap fees daily as they are part of the cost of holding a position.
Platform and Subscription Fees
As a prop trader you need to be aware of various platform and subscription fees that affect your overall cost structure and P&L. These can include software licenses to data feeds to professional memberships.
Software License Fees
Your trading platform is your gateway to the markets and often comes with a cost. Software license fees are the charges you pay for using prop trading software. These fees can vary greatly depending on the complexity of the platform and the features it offers. You need to choose software that balances features with cost.
Data Feed Expenses
Accurate and timely market data is key to trading. Data feed expenses are the costs for real-time price quotes and market information delivered through your trading platform. Depending on the markets you trade and the level of detail you need these can add up so you need to know the pricing structure of the data services you subscribe to.
Professional Membership Subscriptions
To access certain markets or professional trading tools professional membership subscriptions may be required. These can include memberships to trading societies, subscriptions to advanced analytical tools or access to premium research services. While these can give you an edge you need to evaluate the benefits to make sure they are worth the extra cost.
Regulatory and Administrative Fees
As a prop trader you should be aware of the various regulatory and administrative fees that will affect your trading costs. These are mandatory fees charged by different regulatory bodies and entities to comply and to cover operational services related to trading.
Securities Transaction Tax
The Securities Transaction Tax (STT) is charged on the value of securities traded through an exchange. The STT rate varies depending on the type of security and the transaction (buy or sell).
Exchange Fees
Exchange fees are charges by the exchange for the services provided, including but not limited to, order execution. These fees vary depending on the exchange and the product you trade.
Clearing and Settlement Charges
Clearing and settlement charges are the costs incurred during the clearing and settlement process of trades. Clearing houses charge these fees to facilitate the transfer of securities and the associated payments.
Regulatory Compliance Fees
Regulatory compliance fees are the expenses traders incur to comply with industry regulations. These can include fees for real-time monitoring, reporting and compliance with regulatory standards. For example firms may charge fees to cover the cost of maintaining licenses and complying with regulatory policies or professional day-trader processing fees.
Miscellaneous Costs
As a prop trader you’ll have various costs beyond trading commissions. These Miscellaneous Costs need to be tracked carefully to manage your finances.
Withdrawal and Deposit Fees
When you move money in or out of your trading accounts Withdrawal and Deposit Fees may apply. Some platforms charge a fixed fee per transaction while others charge a percentage fee based on the amount being transferred. You need to review the terms of these transactions to avoid surprises.
Inactivity Charges
If you’re not trading you may be charged Inactivity Charges. These are fees charged when an account doesn’t meet a minimum number of trades or activity over a specified period, usually monthly or quarterly. Check your brokerage’s policy as these fees can eat into your capital over time.
Real-time News Service Fees
Real-time news service fees may apply.
Time is key in trading. But this comes at a cost.
Whether it’s a flat fee or subscription-based, factor this into your trading expenses.