I wonder how can the business model of prop shops succeed, given that highly successful traders who can consistently generate profits on their own would rather trade on their own. Why would they want to pay higher commission to a prop shop when Interactive Brokers is cheap? Why would they want to share their profits with others when they can consistently generate profits on their own and take 100% of what they deserve?
Business models of prop-shops?
- Thread starter mizhael
- Start date
For three main reasons, I think ...
First, there are some people with professional trading skills but without adequate capital to trade on their own, for whom it makes sense to use a prop shop temporarily (but "temporarily" can be quite a long time, and meanwhile they're helping the prop shop's business model to succeed, perhaps mostly in the form of volume commissions);
Secondly, there are many more people with what they mistakenly imagine are professional trading skills but without adequate capital to trade on their own, to whom it seems to make sense to use a prop shop temporarily (and the rest is as above: the contracts are typically drawn up and the procedures executed in such a way that the prop shop's own funds are exposed to only minimal - if any - risk);
Thirdly, some so-called prop shops are making a significant part of their incomes by providing other services (I don't mean to suggest that that they're a "front" for escort services, but I think probably some of them are principally education vendors).
A mixture of reasons, perhaps even including some social ones, but probably "undercapitalization" is the commonest.
I think there's a big turnover of these people, and I strongly suspect that the majority of them probably remain undercapitalized, long-term.
There's some turnover of prop shops, too, of course ...
Most "true" prop firms have the lowest rates in the world. In many cases traders earn exchange rebates for providing liquidity bringing their costs to zero. That's one advantage. Two, you will never go balls to the wall with your "own" capital. Guys trade prop so they can swing hard and go to town. That how these guys generate so much wealth. In fact, prop firms encourage this behavior.
Third reason is access to markets with real edge. These guys are not trading ES or CL. These guys are trading OTC products or OTC options and merely using exchange traded futures for hedging. Most people on ET have no idea what prop firms do.
So Maverick74 ... what you think about all these what I call " pretend Prop" whose businesses model is to make money by selling "Tests" and "Education"...and hope hardly anybody passes them and thus no need to fund anybody! and if anybody does pass the test by the time they do that the fees collected by these monthly tests means the trader is actually trading his own money ( The funding is actually notional using futures or worst FX OTC) as compared to SEC licensed regulated firms .. like BT which actually Fund people ( and since it is equity pairs trading there is no Internal product leveraging and the traders need to seat for SEC exams to join the firm!
Again, this question goes back to my main point. And I'm not directing this at you, but most of the people on ET don't know what real prop firms are or what they do. I'm taking about firms like DRW, DV, Ronin, Jane Street, Susquehanna, etc. Most of the firms that ETers reference are NOT prop firms. For example, a firm can provide funding, but that is not the same thing as a prop firm. Hell, I could provide you funding, that doesn't mean I'm a prop firm, it simply means I'm a backer. Firms that sell education are essentially providing a service at a price. They are not prop firms and you won't find that word mentioned anywhere on their website. ETers seem to associate those firms with prop firms for reasons I'm not sure. As a general rule, you won't find prop firms daytrading stocks or futures. Most of them are spreaders, make markets in options or trade OTC products.
Mav, I do understand what you mean may not be at same level as you .
True that the True blue props are those have own Propritery in house Trading "edge" and engage in spreaders, make markets in options etc
They recruit people both from high end educational background and experienced trader not this BS about "Education selling or Pass our test and we may fund you while we pocket the Test fees"
I also take your point about being just a backer ( On first loss type or with firm taking some risk type business model
"The reason many ETers seem to associate those firms with prop firms is becasue of questionable marketing! by these so called Prop frims...I guess
Reason I asked you this question is becasue you had the guts to question BT very pointed questions and perhaps I thought somebody like you shading some light on the breed of Pretend prop" that are popping up might help those who dot know what they are getting in to!
True that the True blue props are those have own Propritery in house Trading "edge" and engage in spreaders, make markets in options etc
They recruit people both from high end educational background and experienced trader not this BS about "Education selling or Pass our test and we may fund you while we pocket the Test fees"
I also take your point about being just a backer ( On first loss type or with firm taking some risk type business model
"The reason many ETers seem to associate those firms with prop firms is becasue of questionable marketing! by these so called Prop frims...I guess
Reason I asked you this question is becasue you had the guts to question BT very pointed questions and perhaps I thought somebody like you shading some light on the breed of Pretend prop" that are popping up might help those who dot know what they are getting in to!
Bright Trading was in a grey area. Not a true prop but they did serve a niche market, equity pair trading and their opening orders strategy. I enjoyed the back and forth with Don and miss those chats with him.
He was a good politician. LOL. But he was not a bad guy. He had a business model and he defended it hard.
