Proprietary Trading Firms

Only if it crosses from trader to dealer, and the Securities Exchange Act leaves that line to the facts. The traditional dealer factors are whether the firm quotes both sides of a market continuously, whether it handles or earns from anyone else's orders, and whether it holds itself out as a market maker; exchange or clearing membership is read alongside them. A firm that trades its own capital through a prime broker with none of those features is a trader and need not register. A firm that joins an exchange to cut its costs, or that lets outside traders use its account, has usually crossed the line. On the derivatives side, futures for the firm's own account require no registration, but swap activity is measured against the swap dealer de minimis threshold and floor trading has a registration category of its own.

Rule 15c3-1 requires a registered broker-dealer to hold liquid capital, computed daily, above a minimum that depends on what it does. A dealer that carries no customer accounts needs $100,000; a market maker needs more, scaled to the securities it quotes. The computation starts from GAAP equity, subtracts assets that cannot be turned to cash quickly, and then takes haircuts on every proprietary position, so a concentrated book consumes capital faster than a diversified one. The firm files FOCUS reports on a set schedule and an audited annual report prepared by a PCAOB-registered accountant. For a proprietary firm the rule decides how large a position the balance sheet can carry, which is why it is read before the first strategy is funded.

A supervisory and compliance program has to fit the firm's actual activities and risks. Common components include written supervisory procedures, trade-surveillance and risk controls, market-conduct and manipulation policies, registration and licensing of associated persons, recordkeeping, and anti-money-laundering procedures where applicable. The program should be documented, owned, and updated as the business and the rules change rather than treated as a one-time exercise.

Two models dominate. In the employee model the trader draws a salary and a payout percentage of net trading profit, and losses are absorbed by the firm or carried forward against the trader's future payouts, because Illinois law forbids deducting them from wages without contemporaneous written consent. In the member model the trader contributes capital to an LLC, receives a Schedule K-1 rather than a W-2, and bears losses through a capital account that must be restored before further distributions. Either way the agreement states the payout formula and its inputs, the high-water mark, and the withdrawal notice period. In Illinois a non-compete is unenforceable below $75,000 of annual earnings and a non-solicit below $45,000, both thresholds rising on January 1, 2027, and the trader must be told in writing to consult a lawyer and given fourteen days to review.

Whoever the paper says, and if the paper is silent, often the trader. An employee's code written within the scope of employment belongs to the employer under copyright law, but a contractor's does not, since software is not among the categories eligible to be a work made for hire; it needs an express assignment. The strategy itself is protected as a trade secret only while the firm takes reasonable measures to keep it secret, which means access controls and signed confidentiality terms, not just a policy. Illinois courts also recognize inevitable disclosure, so a trader who leaves for a direct competitor with the same strategy in his head can sometimes be restrained even without a non-compete. The agreement should schedule the trader's pre-existing models on day one, because arguing about provenance after a departure is the most expensive form of discovery.

Yes, and the order matters. The dealer-trader analysis comes first, because it decides whether the firm is forming an LLC or applying for FINRA membership, a process that takes months. The entity is formed next, with the Section 475(f) election calendared inside its two-month-and-fifteen-day window. The prime brokerage or clearing agreement follows, since the broker's market access controls and margin terms shape what the firm can trade. The trader agreements are signed before the first trader sits, with the assignment, the trade-secret notice and the Illinois review period handled. Supervisory procedures come last, written to describe the firm as it actually operates, because they will be the first document an examiner reads.