Business models of prop-shops?

Szeven · Jan 25, 2011

Quote from Maverick74:

Of course not, but I would be curious to here about how one evaluates it the prop business as an investment. Look, I have a general idea what our numbers are. But just from the standpoint of other alternatives. For example, I have often asked Don both on ET and in person, why not start Bright Capital? Your own hedge fund. If what they are doing has some edge, and I know they have enough capital to put to work, why wouldn't that be a better business model. Don must think that the process of running a commission based firm is a better choice. But why? I actually don't have an answer to that. I don't want or need specifics. Just curious what the pros and cons of one or the other are.

This is something I always wanted to know too. With all the talk about free money JVC, Bob not taking a trading loss in 10 years or whatever, and great profitable generic strategies, I just don't get why they dont further internalize and compound the capital they have. Just when you get close to getting some good info, its on to the next post or topic. Don Bright is like a great restaurant. You finish each course just wanting one more bite, so you keep coming back again and again.

Having said that, the answer must be that he makes more money, and/or prefers the diversity of using the capital to run a prop firm.

Maverick74 · Jan 25, 2011

Quote from Szeven:

This is something I always wanted to know too. With all the talk about free money JVC, Bob not taking a trading loss in 10 years or whatever, and great profitable generic strategies, I just don't get why they dont further internalize and compound the capital they have. Just when you get close to getting some good info, its on to the next post or topic. Don Bright is like a great restaurant. You finish each course just wanting one more bite, so you keep coming back again and again.

Having said that, the answer must be that he makes more money, and/or prefers the diversity of using the capital to run a prop firm.

I agree 100% with what you said but look at it this way. Don is not 22. Neither is his brother. Don has to travel all over the country in questionable health to do these roadshows. He has to put on all these boot camps. He has to market at the local community college. Not to mention all the headaches and hassles of running a prop firm. All the small traders and all their problems. All the regulatory bullshit. All the compliance. Just the sheer paperwork is a nightmare.

Running Bright Capital would require none of that. They could automate what they are doing. They could even raise outside money if they wanted to. Hell they are in Vegas! It would be 100 times easier and not to mention improve the quality of their lives 10 fold. I mean this is more then just about the money. Again, Don and his brother are not 22. I mean look at how much time Don has to spend on ET responding to all my comments. That alone is not worth the hassle.

ScalperJoe · Jan 25, 2011

Quote from Maverick74:

Don has to travel all over the country in questionable health to do these roadshows. He has to put on all these boot camps. He has to market at the local community college. Not to mention all the headaches and hassles of running a prop firm. All the small traders and all their problems. All the regulatory bullshit. All the compliance. Just the sheer paperwork is a nightmare.

Running Bright Capital would require none of that.

Have you seen the Bright's "Class A" member capital from the latest financials or SEC focus report?

I don't believe Don "has" to do any of these things. Prop firms exist because the cost to acquire "all the small traders" is low compared to what a hedge fund spends to recruit talent.

The fact is that prop firms who take in capital contributions from their traders operate on a virtually ZERO risk model (unless of course their in-house strategies fail, and thus expose the firm to beyond the Class B members funds).

How easy is it to get in with a hedge fund? Is it as simple as joining a prop? If you have a Phd in statistics and can write HFT programs, then perhaps you've got a chance. Look at the hedge fund jobs at the following site and see what is required to join one of those firms:

http://jobs.efinancialcareers.com/Hedge_Funds-Trading.htm

Maverick74 · Jan 25, 2011

Quote from ScalperJoe:

Have you seen the Bright's "Class A" member capital from the latest financials or SEC focus report?

I don't believe Don "has" to do any of these things. Prop firms exist because the cost to acquire "all the small traders" is low compared to what a hedge fund spends to recruit talent.

The fact is that prop firms who take in capital contributions from their traders operate on a virtually ZERO risk model (unless of course their in-house strategies fail, and thus expose the firm to beyond the Class B members funds).

How easy is it to get in with a hedge fund? Is it as simple as joining a prop? If you have a Phd in statistics and can write HFT programs, then perhaps you've got a chance. Look at the hedge fund jobs at the following site and see what is required to join one of those firms:

http://jobs.efinancialcareers.com/Hedge_Funds-Trading.htm

Joe, I think you are I are not talking about the same thing. We are getting are signals crossed. I don't mean hedge fund like SAC. I just mean that Bob and Don would trade their own capital and use some of their more successful guys to trade as well.

And let me clear something up for you. This business is the furthest thing from zero risk. It really gets under my skin when people make comments like that. It's simply not true. If it were, we would not have gone from 50 prop firms to 5 over the last 3 years. Statements like that also set off guys like Brokenmarkets who think prop firms are sitting back and printing money while all their traders go broke. I've been in this business for a long time man and this business is full of risk. It's a lot of hard work. It's a grind man.

Running the family money as an in house fund would be far more lucrative and less stressful provided what they are doing works. That's a big "if" of course.

Don Bright · Jan 26, 2011

Quick comment: I actually enjoy the "road shows" - I like getting together with my traders, industry professionals, and all the others as well.

Good fun, enjoyable, and interesting.

Don

operator · Jan 26, 2011

Quote from Maverick74:

Don is not 22. Neither is his brother. Don has to travel all over the country in questionable health to do these roadshows. He has to put on all these boot camps. He has to market at the local community college.

Mav, you crack me up. A little hard work is a good thing.

EDIT: And don't give me this crap that we are not on the same page, apples and oranges, you don't understand what I'm saying, Let me explain it a different way, etc....

LEAPup · Jan 26, 2011

Quote from Don Bright:

Quick comment: I actually enjoy the "road shows" - I like getting together with my traders, industry professionals, and all the others as well.

Good fun, enjoyable, and interesting.

Don

I agree completely! I really look forward to the quarterly trips to San Diego. For five days, we get together, train, go over what's new in the business, etc.,

After "work," we gather our spouses and take in sights as a team, plus have dinner together. The group was so large the last time that the restaurant put tables together on the beach for us, and had large floodlights lighting up the waves as they came in. Good stuff!

I'm counting the days to San Diego as the snow flies here... Help!!! Lol

ScalperJoe · Jan 26, 2011

Quote from Maverick74:

Joe, I think you are I are not talking about the same thing. We are getting are signals crossed. I don't mean hedge fund like SAC. I just mean that Bob and Don would trade their own capital and use some of their more successful guys to trade as well.

And let me clear something up for you. This business is the furthest thing from zero risk. It really gets under my skin when people make comments like that. It's simply not true. If it were, we would not have gone from 50 prop firms to 5 over the last 3 years. Statements like that also set off guys like Brokenmarkets who think prop firms are sitting back and printing money while all their traders go broke. I've been in this business for a long time man and this business is full of risk. It's a lot of hard work. It's a grind man.

Running the family money as an in house fund would be far more lucrative and less stressful provided what they are doing works. That's a big "if" of course.

Ok, I understand what you are saying. When I write about "risk" I'm making a reference to the prop firm taking on risk from the Class B member. Can you cite an example of that? If 50 prop firms have become 5, then why is that? If it's the trader's blowing up their own accounts, then how does the Class A partners firm capital expose their risk?

The prop firm model can be lucrative and running any business involves "hard work" and "a grind", just like your example of being far more (or less) lucrative than running an in house fund, it's also a big "if" of course!

Maverick74 · Jan 26, 2011

Quote from ScalperJoe:

Ok, I understand what you are saying. When I write about "risk" I'm making a reference to the prop firm taking on risk from the Class B member. Can you cite an example of that? If 50 prop firms have become 5, then why is that? If it's the trader's blowing up their own accounts, then how does the Class A partners firm capital expose their risk?

The prop firm model can be lucrative and running any business involves "hard work" and "a grind", just like your example of being far more (or less) lucrative than running an in house fund, it's also a big "if" of course!

The class A capital goes before the class B capital.

Example: Say the Bright's have 10 million in Class A capital and through all the traders deposits that total comes to 5 million. That's the Class B capital. Say a guy named Billy who has a 25k deposit loses 500k. The fist 25k comes out of Billy's 25k account. That money is gone now. The other 475k comes out of the Class A Partners, the Brights in this example. They get hit first.

Once all the Class A capital has been depleted, then we go into the Class B funds. Once the Class B funds gets depleted, then you go into the clearing firm's capital, in this case Goldman.

The reason we went from 50 firms down to around 5 is that the other 45 firms could no longer generate cash flow. There is a fixed cost to being a broker deal whether you have 3 traders or 3,000. So you have to make that nut every year just to breakeven. And what makes trading firms risky, is that usually all your revenue is coming from the top 5% of your traders. The other 95% make just enough to cover the firm's overhead. Now here's the catch, those top 5% guys are usually not under any kind of no compete. They can walk whenever they want. A guy across the street gives them a better deal, they walk. Well, anytime you have a situation where your revenue can simply get up and walk out the door, that exposes you to a lot of risk. The bad traders aren't going anywhere. They will stay with you for life. It's the good traders that are very mobile. They can trade anywhere and everyone will bid for their business.

I traded for a firm that at the time was number two in the country to Schonfeld. We did 5% of the NYSE volume everyday. They were charging guys 4 to 5 times more in commissions then the going rate now. They were rolling in money during the late 90's and early 2000's. They folded in 2004. Not only did they fold, but they didn't even have enough money to pay back the last 1/3 of traders capital. If they can go under, anyone can. And the Bruan family that owned the firm had 10 times the net worth of Bob Bright so it wasn't lack of family capital.

Don Bright · Jan 26, 2011

Quote from Maverick74:

Joe, I think you are I are not talking about the same thing. We are getting are signals crossed. I don't mean hedge fund like SAC. I just mean that Bob and Don would trade their own capital and use some of their more successful guys to trade as well.

And let me clear something up for you. This business is the furthest thing from zero risk. It really gets under my skin when people make comments like that. It's simply not true. If it were, we would not have gone from 50 prop firms to 5 over the last 3 years. Statements like that also set off guys like Brokenmarkets who think prop firms are sitting back and printing money while all their traders go broke. I've been in this business for a long time man and this business is full of risk. It's a lot of hard work. It's a grind man.

Running the family money as an in house fund would be far more lucrative and less stressful provided what they are doing works. That's a big "if" of course.

OK, I can address this a bit. My brother currently has a sizeable chunk of the family money in use in his own trading. This does not affect the Firm's capital or anything of course, but in lieu of having a separate "fund" - he simply trades the money. He has, in many years (especially recently) made much more money from trading than from BT revenues.

So, same idea, our way of doing it. We have, in the past, used our family LLC for trading too, including other family members. We have set up trading groups etc. over the years as well. And we back our JVC traders currently. So, overall we keep the money in good use.

As far as firm risk goes, you are ABSOLUTELY RIGHT - and I, too grimace a bit when others think differently or think we are "printing money" or some such. We enjoy what we do, we work hard at it...and maybe, others might not work as hard as we do to keep our company strong. I was actually told by a, how should I say it? .... another "group" - big name, that we work too hard for our much smaller profit margins. Some may, based on "reputation" (much not deserved) as being high priced, think this is not true. Well, as they say..everyone is welcome to their opinions, but not to change the facts. We're a private company, and can't share actual numbers (other than balance sheets, which we happily provide to add to traders confidence)... and we're doing "fine" - could be better, but since we enjoy this, and what the heck else would I do at 60 years old? LOL.

FWIW,

Don