Business models of prop-shops?

Quote from Maverick74:

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.
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Yes, however your example stipulates that the prop firm is going to allow the trader, "Billy", to incur a drawdown of 475k of the Class A partner's risk. That doesn't sound like proper risk management of the prop firm. I traded in a firm where the daily risk was limited to 5% of the trader's deposit, and if it went below then risk managers had the ability to stop you out.

Look, I'm all for the prop model, as it's allowed me to learn techniques that I currently use in my trading plan. Since most firms do not allow for overnights, it doesn't seem even plausible for "Billy" to take a hit of that magnitude. Even Bright claims that his traders who hold positions overnight are hedged.

Again, all I'm suggesting is the prop firm does not have to be impacted from taking a hit if the Class B member "blows up", since there are risk paramaters in place which would preclude the situation you mention.

Your other points regarding the top 5% of traders carrying a firm are quite valid, similar to the real estate market, where the top 10% of realtors make 90% of the income.
 
Quote from ScalperJoe:

Yes, however your example stipulates that the prop firm is going to allow the trader, "Billy", to incur a drawdown of 475k of the Class A partner's risk. That doesn't sound like proper risk management of the prop firm. I traded in a firm where the daily risk was limited to 5% of the trader's deposit, and if it went below then risk managers had the ability to stop you out.

Look, I'm all for the prop model, as it's allowed me to learn techniques that I currently use in my trading plan. Since most firms do not allow for overnights, it doesn't seem even plausible for "Billy" to take a hit of that magnitude. Even Bright claims that his traders who hold positions overnight are hedged.

Again, all I'm suggesting is the prop firm does not have to be impacted from taking a hit if the Class B member "blows up", since there are risk paramaters in place which would preclude the situation you mention.

Your other points regarding the top 5% of traders carrying a firm are quite valid, similar to the real estate market, where the top

10% of realtors make 90% of the income.
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Don had a trader go into the firm for 7 figures on a pair trade gone bad. It happens. Every trader has gap risk. Whether that gap comes overnight or intra-day. Do you want to know how many guys at my old firm dropped 500k in a minute on an intra-day stock halt. It was a weekly occurrence.

Look, nobody thinks its going to happen to them. That's why guys sell naked puts. I'm sure the Bright's keep a tight lid on the risk. I don't doubt that. But shit happens.
 
FYI, regarding trader risk (and since we just covered all this during the current class)... we monitor to see if a trader is down OR UP 10% of their net value. Management is then alerted, and will respond as needed. If it is a long time trader, with $800K in net value, and they are known to "swing a big bat" - we just check overall positions, maybe send an IM to "check in."

If we see a new trader down $2,000, we check their positions, touch base with them (either their immediate manager, risk control, or me). Ask what their plan is - make a suggestion that they perhaps only cut back their positions a bit....basically we want to be sure they are "in control" and not on "tilt" - as Mav says "stuff happens."

We contact maybe 2-4 traders per month with any risk related concerns. And we've had less than 5 examples of anyone losing anything over a few grand of Firm money (including the 7 figure loss we absorbed a few years ago - a lesson learned, a new paradigm put into place, this (particular thing) shouldn't happen again).

A big part of risk control is to simply give traders another set of eyes, an objective view at what they're doing...and to protect them from themselves. So often I hear...."yeah, you're right, I should cut back" or something similar. At the same time, a negotiated compromise often is the end result.


Don
 
Quote from Don Bright:

A big part of risk control is to simply give traders another set of eyes, an objective view at what they're doing...and to protect them from themselves. Don
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Well said. The best value I got from trading a prop account was "forced discipline", which has enhanced my personal risk management skills while trading a retail account.
 
Quote from Don Bright:

FYI, regarding trader risk (and since we just covered all this during the current class)... we monitor to see if a trader is down OR UP 10% of their net value. Management is then alerted, and will respond as needed. If it is a long time trader, with $800K in net value, and they are known to "swing a big bat" - we just check overall positions, maybe send an IM to "check in."

If we see a new trader down $2,000, we check their positions, touch base with them (either their immediate manager, risk control, or me). Ask what their plan is - make a suggestion that they perhaps only cut back their positions a bit....basically we want to be sure they are "in control" and not on "tilt" - as Mav says "stuff happens."

We contact maybe 2-4 traders per month with any risk related concerns. And we've had less than 5 examples of anyone losing anything over a few grand of Firm money (including the 7 figure loss we absorbed a few years ago - a lesson learned, a new paradigm put into place, this (particular thing) shouldn't happen again).

A big part of risk control is to simply give traders another set of eyes, an objective view at what they're doing...and to protect them from themselves. So often I hear...."yeah, you're right, I should cut back" or something similar. At the same time, a negotiated compromise often is the end result.


Don
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Good post Don! Agreed completely!
 
Quote from Don Bright:

Just check for Don Bright on either facebook or twitter.


Don :)
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Are you f*cking serious? OMG. OK. That was it. I was waiting for the signal to call the mothership to come pick me up and take me away. That was it Don. I'll get on that call now right away. Time is a wasting.
 
Quote from Maverick74:

Are you f*cking serious? OMG. OK. That was it. I was waiting for the signal to call the mothership to come pick me up and take me away. That was it Don. I'll get on that call now right away. Time is a wasting.
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:D :D :D :D
 
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