A Prop Shop is a company that facilitates proprietary trading. It may offer outside traders to join the prop shop. The prop shop then acts as a brokerage house for the trader.
The prop shop can use any strategy and invest in all types of asset classes. The prop shop provides leverage and the ability to trade short positions. The trading can be done by human traders or by computers and algorithms.
The prop shop may be a physical office or have traders connect remotely.
Prop shop trader
The prop shop may take on board outside traders. The outside trader may use the prop shop as a sort of brokerage and then pay fees or commission for use of the prop shops's infrastructure. Any outside traders are under strict risk control and monitoring by the prop shop.
For an independent trader a prop shop may be more suitable than a traditional stock broker because of access to higher leverage and better commission rates. Also there are more relaxed rules to SEC rules for minimal capital requirements in order to day trade on leverage. Also the trader gets access to the infrastructure such as programs and computers for trading.
A prop shop may be under a more relaxed regulation than a regular brokerage company. Often capital is pooled and there is a higher risk that you can lose money if the Prop Shop goes bankrupt.
The Prop shop makes money on order flow, such as commission and rebates. Also it can charge a monthly rent to the trader for use of computers and programs.
As in any business there are reputable and less reputable companies. It would be advisable for the trader to think long term and find a prop trader that wants the trader to succeed long term by getting the trader to be profitable, and not quickly churn and burn inexperienced traders.