Business models of prop-shops?

[Don Bright]

Quote from Maverick74:

Don, I'm referring to your "haircut" charges. I can do the math for you if you want me to.

BTW, I'm not saying there is anything wrong with that or you are doing anything illegal. It's your money, you are allowed to lend it out at whatever the market will bare.

Thanks for allowing me to present this.

6 times your equity = no haircut
6-10 times your equity = 2% per year....so, if you are using 10 times your equity, you're paying less than 1% per annum.

It does go up from there, and each trader who's business plan calls for 20 or 30 times equity, they simply factor in the fees. Never gets to credit card rates.

Don

 

[ScalperJoe]

Quote from Maverick74:

Yes. But all or most of Don's traders hold positions overnight as do most of our traders.

Which btw, is why most daytrading shops are struggling. If they are not getting this money and are relying solely on commissions, then they have a tough road ahead of them.

Please explain. The Canadian props charge as low as 20 cents per 1,000 for the high volume "rebate based" traders, whereas firms such as Bright are $4 per 1,000 on average (Don can correct this if I'm mistaken, but that's what I believe he said was the average rate of what his traders pay during a recent seminar).

CBSX firms will often quote $5 per thousand to an inexperienced newbie, and most will settle on $2-$3 per thousand. Let's say their clearing costs including overhead are $1 per thousand, that's up to a 5x markup or a 500% return on a trader's commission, not including any splits on profits. And they operate on ZERO or very limited risk since the props require a capital contribution to hedge against losses (similar to Bright).

Since most prop firms don't allow for overnights, the only way to generate revenue is from the markup on commissions and from the profit splits from their traders who make money. (Let's leave the training fees/education out of the equation for the moment).

I have noticed, however, that a certain CBSX firm (no need to mention the name) listed in its SEC focus report that it had to borrow funds at what one can say was an astronomical interest rate to ensure its net cap requirement was in compliance with SEC 15c3-1. I guess you can call that "struggling", but otherwise, can you cite some examples for making the claim that props who do not allow for overnights and are "relying solely on commission have a tough road ahead of them."

 

[swiftmike99]

Quote from Maverick74:

I'll tell you where firms make their money. Believe it or not, it's not from commisons anymore. Don makes some decent coin on the training fees (boot camp) etc. But the real magic is the lending of capital. Don can borrow money from GS for almost nothing now. Same goes for most firms. And they charge interest to the traders for leveraging that money. Now I know what some of you guys are thinking. How much can Bright or any firm really make on interest.

I'll tell you. I'm going to use Bright as an example so as not to advertise my firm (you're welcome Don). Let's say Bright has 20 million in capital. And let's say through all the various pairs they trade they are able to deploy all that capital to their traders. Goldman will lend Don 6.5 times that 20 million in the JBO. That's about 120 million. Let's say Don can make 500 bp on that spread. That's a cool 6 million for swapping cash from a master account to a sub account. Let me put this another way. On that 20 million, they are earning 30% a year interest on that money almost risk free. Try getting that rate at your local bank.

As the old saying goes, good work if you can find it.

ps Bright is making more then 500 bp on that spread. I was being very conservative.

He is making money on executions. clearing etc costs 8 cents. he charged 5$ or something. thats 4.92$ in profit for every 1000 shares traded.

 

[LeeD]

Quote from Don Bright:

6-10 times your equity = 2% per year....so, if you are using 10 times your equity, you're paying less than 1% per annum.

So, at 10x a trader's equity, the trader pays 8%=(10-6)*2% of his or her equity in the haircut alone. Did I get the numbers right?

 

[Maverick74]

Quote from ScalperJoe:

Please explain. The Canadian props charge as low as 20 cents per 1,000 for the high volume "rebate based" traders, whereas firms such as Bright are $4 per 1,000 on average (Don can correct this if I'm mistaken, but that's what I believe he said was the average rate of what his traders pay during a recent seminar).

CBSX firms will often quote $5 per thousand to an inexperienced newbie, and most will settle on $2-$3 per thousand. Let's say their clearing costs including overhead are $1 per thousand, that's up to a 5x markup or a 500% return on a trader's commission, not including any splits on profits. And they operate on ZERO or very limited risk since the props require a capital contribution to hedge against losses (similar to Bright).

Since most prop firms don't allow for overnights, the only way to generate revenue is from the markup on commissions and from the profit splits from their traders who make money. (Let's leave the training fees/education out of the equation for the moment).

I have noticed, however, that a certain CBSX firm (no need to mention the name) listed in its SEC focus report that it had to borrow funds at what one can say was an astronomical interest rate to ensure its net cap requirement was in compliance with SEC 15c3-1. I guess you can call that "struggling", but otherwise, can you cite some examples for making the claim that props who do not allow for overnights and are "relying solely on commission have a tough road ahead of them."

Sure. The fact of the matter is, starting and running a prop firm is very expensive. It costs millions to start one and millions a year to maintain it. There is administrative costs, compliance, marketing, legal and the audits. It's very very expensive. Most firms only have a handful of traders that truly generate revenue for the firm. A majority of the traders are small and will never make it. Some guys will eventually trade a lot and not make any money but they have a capital burn out rate. Once they run out of money, they are gone. The firm has to make a lot of money in commissions just to get to breakeven. More and more firms are struggling to do this.

Not to mention overall trading volumes are down. This is why Don suggested starting a trading group vs starting a trading firm. A group cost no money and the firm costs a fortune. It doesn't matter how high Don starts a trader on rates, they will walk if he doesn't lower them once they are trading size. So at the end of the day Don has to offer close to costs to keep his best traders otherwise he is left with the 100 share newbies that don't generate any revenue for the firm. I think a lot of guys on this thread are very naive to the costs involved in running one of these firms. The regulatory costs are astronomical and getting worse.

 

[Maverick74]

Quote from Don Bright:

Thanks for allowing me to present this.

6 times your equity = no haircut
6-10 times your equity = 2% per year....so, if you are using 10 times your equity, you're paying less than 1% per annum.

It does go up from there, and each trader who's business plan calls for 20 or 30 times equity, they simply factor in the fees. Never gets to credit card rates.

Don

Don, nobody on this forum understands these numbers when you refer to notional leverage. Six times your equity is one to one haircut. Let me help explain. If I buy 100 shares of a $100 stock, in notional terms that costs 10k. In a retail account, IB will margin you for 5k of that. At a prop firm you only need to post 1500 in margin. Nobody is lending you any money at this point. That's what your margin is. In order to pair trade Don, you and I both know this, one needs to have access to a substantial sum of money. I'm talking 3 to 1 or 5 to 1 on haircut. Or as you would call it 15 to 30 to 1 leverage. That's a fact Don. The margin on a pair trade is very thin. Nobody would many any money if they were scalping 100 shares of HD against 100 shares of LOW.

When you annualize the rate they are paying on their deposited capital, not on the notional amount of capital, in some cases guys are paying 20% to 30% a year in interest. It has nothing to do with credit card rates as they are not an apple to apple comparison. Yes, it's a cost of doing business. And yes, the vig is way too high for most to overcome. And yes, it's a great revenue source for the prop firm. And no, there is nothing wrong with you charging that. Like you said, it's a business.

 

[ScalperJoe]

Quote from Maverick74:

Sure. The fact of the matter is, starting and running a prop firm is very expensive. It costs millions to start one and millions a year to maintain it. There is administrative costs, compliance, marketing, legal and the audits. It's very very expensive. Most firms only have a handful of traders that truly generate revenue for the firm. A majority of the traders are small and will never make it. Some guys will eventually trade a lot and not make any money but they have a capital burn out rate. Once they run out of money, they are gone. The firm has to make a lot of money in commissions just to get to breakeven. More and more firms are struggling to do this.

Not to mention overall trading volumes are down. This is why Don suggested starting a trading group vs starting a trading firm. A group cost no money and the firm costs a fortune. It doesn't matter how high Don starts a trader on rates, they will walk if he doesn't lower them once they are trading size. So at the end of the day Don has to offer close to costs to keep his best traders otherwise he is left with the 100 share newbies that don't generate any revenue for the firm. I think a lot of guys on this thread are very naive to the costs involved in running one of these firms. The regulatory costs are astronomical and getting worse.

Thanks for the prompt reply and analysis, it does seem that there is a trending shift even from the registered firms to offer "education and training", as I've been noticing firms who relied on traders to generate income are now changing their model to generate revenues up front. Sort of like a "front end load" for a mutual fund.

I'm all for training, if the person feels it will eventually help them in developing a viable strategy to pull money out of the markets. Still, I do agree with you that firms that allow for overnights will attract more traders (and thus have added value), especially when one realizes that daytrading is NOT as easy as it seems.

 

[Maverick74]

Quote from ScalperJoe:

Thanks for the prompt reply and analysis, it does seem that there is a trending shift even from the registered firms to offer "education and training", as I've been noticing firms who relied on traders to generate income are now changing their model to generate revenues up front. Sort of like a "front end load" for a mutual fund.

I'm all for training, if the person feels it will eventually help them in developing a viable strategy to pull money out of the markets. Still, I do agree with you that firms that allow for overnights will attract more traders (and thus have added value), especially when one realizes that daytrading is NOT as easy as it seems.

Trust me, it has not been lost on the Brights how much they can make doing their boot camps or any firm selling education. It costs the firm nothing really. In the old days at Worldco, we use to give guys the exact same (if not better) training for newbies but they didn't charge a dime for it as it didn't cost them anything to do it. You get 30 guys and charge them 1500 a pop and do that 3 to 6 times a year, that's good money.

 

[ScalperJoe]

Quote from Maverick74:

Trust me, it has not been lost on the Brights how much they can make doing their boot camps or any firm selling education. It costs the firm nothing really. In the old days at Worldco, we use to give guys the exact same (if not better) training for newbies but they didn't charge a dime for it as it didn't cost them anything to do it. You get 30 guys and charge them 1500 a pop and do that 3 to 6 times a year, that's good money.

How's this model: Team Trading charged around $10,000 to 30 to 40 traders a week, and did that TWICE A MONTH! Prop firms have obviously taken notice, and have started selling education, or shall I say, "selling the dream", lol! Seriously, I'm one who paid a dear sum for the training, and I don't regret it, as I do believe the techniques I learned are workable as I use them everyday in my strategy. Also, it was more than just a seminar, it was an account I could trade in for two+ years on their dime, plus access to continued education. Of course, the buying power was so limited that hardly anyone made money, albeit a great learning experience.

There was a presentation at the last Trader's Expo by Ken Calhoun, and he has a very comprehensive disclaimer on his company's website that the firm generates the MAJORITY of its revenue from selling its training. I give him kudos, as most firms would never want to admit this, for obvious reasons.

 

[Roark]

Maybe they should omit trading all together and just sell seminars and CD's.