Bright Trading's new payout model

[Lights]

What's the big deal, so then traders move to another firm offering 100%.

Quote from Maverick74:

I honestly think it's two things. One, GS is not interested in clearing the mom and pop type prop firms anymore. And two, GS is probably under a lot of pressure to streamline their business due to concerns over regulatory scrutiny.

GS clearing fees are already sky high and GS is not going to get the 20%, Bright will. So GS will not offer anything better then what they are already offering now. Now, will Bright lower their fees? Well, they will be under intense pressure to do that. However that is something they certainly do not want to do. Most these prop traders are not making money, so Don stands little to gain by getting their p&l and then having to give up the sure money he gets from commissions.

 

[Maverick74]

Quote from Lights:

What's the big deal, so then traders move to another firm offering 100%.

Well, the 100% days are over. But there certainly are no shortage of firms that offer much higher payouts then 80%. The problem Don is going to have is that there actually are a lot of firms that offer 60% to 80% payouts where the traders use firm capital. Margins are getting squeezed everywhere.

I honestly think equity prop firms will be non existent in the next few years. At some point the risk to reward for stock starts to get really ugly. Back in the Worldco days the margins were sick, I mean sick. That world is gone. Now I see both firms and traders alike having to take more and more risk to make less and less money. The math simply doesn't add up. Of course this can be said of our entire financial system in general.

Right now in my opinion, I think equity prop firms are the equivalent of an option seller. Basically selling .10 options and praying the music doesn't stop.

 

[Don Bright]

Quote from Maverick74:

Actually that is not the concern. Don you should walk over to your compliance dept and get to know them a little better. LOL. The issue is AML policy which I know your firm must enforce strictly as we do as well.

The issue is with having the ability to launder money from one account to another or possibly even launder the money out of the country without a trace. In fact there was recently a case where exactly this was done through two FCM's where over 7 figures was transferred from an account in the US to Russia.

Yes my friend, you are right...the money laundering historically was done for the reasons I noted long before we were concerned about "drug money" or other bad guys. But, yes, we had to appoint a AML "czar" as well, LOL.

Don

 

[Don Bright]

Quote from Maverick74:

Well, the 100% days are over. But there certainly are no shortage of firms that offer much higher payouts then 80%. The problem Don is going to have is that there actually are a lot of firms that offer 60% to 80% payouts where the traders use firm capital. Margins are getting squeezed everywhere.

I honestly think equity prop firms will be non existent in the next few years. At some point the risk to reward for stock starts to get really ugly. Back in the Worldco days the margins were sick, I mean sick. That world is gone. Now I see both firms and traders alike having to take more and more risk to make less and less money. The math simply doesn't add up. Of course this can be said of our entire financial system in general.

Right now in my opinion, I think equity prop firms are the equivalent of an option seller. Basically selling .10 options and praying the music doesn't stop.

Might be time to have another audio discussion with you about the things that are working in today's environment...help people out a bit...I am extremely motivated after our weekend long Intensive workshop over the last couple of days. We addressed everything, and had our top people (some who had fewer than 7 losing days this year, even I was a bit shocked).

With all the pessimism out there (much of it rightfully so), it was nice to hear the good stuff.....and, as always, I'm sure your top guys are doing well with the derivatives.

Just educational...I think we were well received last time we had an online event....whaddya think?

(I guess I could just call you, LOL).

Don

 

[Maverick74]

Quote from Don Bright:

Might be time to have another audio discussion with you about the things that are working in today's environment...help people out a bit...I am extremely motivated after our weekend long Intensive workshop over the last couple of days. We addressed everything, and had our top people (some who had fewer than 7 losing days this year, even I was a bit shocked).

With all the pessimism out there (much of it rightfully so), it was nice to hear the good stuff.....and, as always, I'm sure your top guys are doing well with the derivatives.

Just educational...I think we were well received last time we had an online event....whaddya think?

(I guess I could just call you, LOL).

Don

Sure we could do that again.

The point I am trying to make Don is not that there is no one making money. I'm talking about this from the prop firm's prospective. Look, that guy you talk about who had fewer then 7 losing days in the last year, what do you make on that guy? You are not getting his p&l right? No, you are getting his commissions. That guy could have only had 7 winning days last year and you as a firm could have theoretically made the same amount on him in commissions.

The problem Don is that there are not enough of those guys to offset the dead weight. The reason I used the option seller analogy is precisely because of that guy you just mentioned. Firms have to lean really hard on those exceptional traders. Not just Bright Trading but every prop firm all the way up to the Goldman's and JPM's of the world. You don't own those assets. Those assets have flight risk. A majority of your traders produce less then 10% of your firm's revenue. The top 10% make or break your firm. This is not just true of Bright Trading but every trading firm in the world.

So in order for your firm to stay solvent, you have to keep those guys and subsidize the bad guys. But as you are doing this your margins keep getting tighter and tighter and the risk keeps getting higher and higher. Just like our banking system, it's a tight rope. At some point the music stops playing.

BTW, these issues I am bringing up I'm not trying to throw them all in your direction, these are problems the entire industry is facing. Look, you guys never use to look at guys with less then 25k in capital. Then that dropped to 20k. Now I see you will look at guys with 10k. When does it go to 5k? Or 1k? You should not have to do that. In fact, you should be going the other way. Our firm has been raising capital requirements every year, not lowering them. This is usually the sign that an industry is in it's final stages where you basically open the doors and take anyone.

Again, I'm not trying to insinuate that Bright Trading is going to go under. Bob is a smart guy. Don, not as much (just kidding). You guys do have a valuable asset and that is capital and I'm sure Bright 2.0 is around the corner. You'll find a way to evolve, you have the money to do it. But Bright Trading as it exists in its current form as well as most day trading stock firms, will probably not exist in 2 years. Just one man's opinion. I am often wrong.

 

[rwk]

Quote from Maverick74:
The issue is with having the ability to launder money from one account to another or possibly even launder the money out of the country without a trace.

I still don't understand this or Don's statement. It's my understanding that the requirement to disclose applies only to licensees. I have no trading-related licenses -- don't need any -- and so far as I know, I can have accounts scattered all about with no disclosure. Am I wrong about that?

 

[Maverick74]

Quote from rwk:

I still don't understand this or Don's statement. It's my understanding that the requirement to disclose applies only to licensees. I have no trading-related licenses -- don't need any -- and so far as I know, I can have accounts scattered all about with no disclosure. Am I wrong about that?

Exactly. When you trade a firm account, the account is not in "your" name. Very easy to launder money. If I have an IB account in "my" name and launder the money to my TOS account in "my" name, well, that's a pretty easy paper trail even for our incompetent SEC to follow.

 

[Don Bright]

Quote from Maverick74:

Sure we could do that again.

No, you are getting his commissions. That guy could have only had 7 winning days last year and you as a firm could have theoretically made the same amount on him in commissions.

Actually, our commission revenue is down considerably, and doesn't even concern us that much overal - our net pricing is down 40%, obviously GS has not come down. As you mention, the use of capital, although cheap at 3% per year (for our JVC, and average for normal accounts) is "making" more money than commissions. As you noted, our firm's "edge" for traders is capital usage.


Goldman's and JPM's of the world. You don't own those assets. Those assets have flight risk.
What we discussed with our people over the weekend - those who keep a few $million in their Bright accounts, is to take most the money to IB or MBT or somewhere for a good portion of their trading....and just keep $250K or so with us for their leveraged out pairs, mergers etc.

FWIW, Aug 1 was the deadline for signing the new "deal" (contract), and we had only 2 resign noting the "deal" had changed. And, to be honest, I don't think that was the real reason.


BTW, these issues I am bringing up I'm not trying to throw them all in your direction, these are problems the entire industry is facing. Look, you guys never use to look at guys with less then 25k in capital. Then that dropped to 20k. Now I see you will look at guys with 10k.
To be fair, we have always entertained, and brought on recent college grades, with high skill levels in computers and programming with about $10K - it's just the old geezers (ovefr 40, LOL - not that we age discrminiate, that we worry about, LOL).

You'll find a way to evolve, you have the money to do it. But Bright Trading as it exists in its current form as well as most day trading stock firms, will probably not exist in 2 years. Just one man's opinion. I am often wrong.

Yep, you hit the nail on the head...adapting is the key to success, and boy have we gone through some changes over the years. One thing remains fundamental...traders have to make money, regardless of "splits" or costs or anything else...if they don't, the go away...we're pretty proud of our traders ability to adapt along with us.

Don

 

[Maverick74]

Quote from Don Bright:

Actually, our commission revenue is down considerably, and doesn't even concern us that much overal - our net pricing is down 40%, obviously GS has not come down. As you mention, the use of capital, although cheap at 3% per year (for our JVC, and average for normal accounts) is "making" more money than commissions. As you noted, our firm's "edge" for traders is capital usage.

Don, if I owned stock in Bright Trading I would be selling it short with impugnity if I heard you say that at a board meeting. You have to care about commision revenue. If you are making all your money on just the rake you charge guys for lending capital then I change my mind on what I said about Bright 2.0. LOL.

What we discussed with our people over the weekend - those who keep a few $million in their Bright accounts, is to take most the money to IB or MBT or somewhere for a good portion of their trading....and just keep $250K or so with us for their leveraged out pairs, mergers etc.

FWIW, Aug 1 was the deadline for signing the new "deal" (contract), and we had only 2 resign noting the "deal" had changed. And, to be honest, I don't think that was the real reason.


Again Don, if I were long your stock and I heard you telling your traders that the best place for their capital is "NOT" at Bright Trading, I couldn't hit the sell short button fast enough.


To be fair, we have always entertained, and brought on recent college grades, with high skill levels in computers and programming with about $10K - it's just the old geezers (ovefr 40, LOL - not that we age discrminiate, that we worry about, LOL).

That is not my understanding. Don I have sent many many traders to you when we could not service the business who did not have 25k and you turned them away in spades. This is a very new development to hear that you always took these guys on. In fact you and I have had meetings in person where we both agreed that it was silly to take guys in with such little capital. In fact you and I both laughed at the funny 5k down and pull the lever prop firms out there.


Yep, you hit the nail on the head...adapting is the key to success, and boy have we gone through some changes over the years. One thing remains fundamental...traders have to make money, regardless of "splits" or costs or anything else...if they don't, the go away...we're pretty proud of our traders ability to adapt along with us.

How are you adapting? Are you moving into futures? Options? OTC? I believe your bread and butter is still the same as it was 10 years ago, pair trading. Only 10 years ago guys were trading 10 times bigger and you had 10 times the profit margins. The only change I see is your margins getting crushed and your risk going higher. Don, you know I am straight shooter that is how I know you are not taking offense to this. There is nothing wrong with telling the truth and admitting this industry, at least how it pertains to stock, is dying. It may not be fair, it may not be just, but it is happening. Just as the floor model died, so too is this. I don't like it anymore then you do. I don't mind playing good cop/bad cop with you, but I think we need to be honest with the trading community. I've always thought you ran a good honest business and I still believe that to be the case even though we obviously disagree on the state of the business and this silly thing called pair trading (kidding again Don). I think I have a better pulse on things out here in Chicago as I hear how a lot of the prop firms are doing. Both stock, options, futures and everything in the middle. It's pretty grim Don. God knows what will happen if the government takes the leverage away. Where would this country be if we could not leverage everything in sight 100 to 1? A banana republic?


Don [/B]

 

[Lights]

I'll have to agree with Don here. Firms that evolve with the changing regulations and adjust to those new markets survive. It's always been survival of the fittest and always will be.

Having said that, I will agree with Maverick in that firms that do not risk capital and share risk with traders probably won't be around much longer. Those that do seem to be doing just fine these past 3 years.

Quote from Don Bright:



Actually, our commission revenue is down considerably, and doesn't even concern us that much overal - our net pricing is down 40%, obviously GS has not come down. As you mention, the use of capital, although cheap at 3% per year (for our JVC, and average for normal accounts) is "making" more money than commissions. As you noted, our firm's "edge" for traders is capital usage.