Definition Of A Prop Firm

B

bootize

Hello,

I read through a lot of the threads relating to prop firms, in addition to other internet searches, but I still just want to clarify what I <i>think</i> I understand a prop firm to be.

If someone was interested in trading a basket of futures markets, but didn't have sufficient capital of their own to trade them all, they could deposit money and join a prop firm. In turn, they can trade the basket of futures markets using the overall prop firm's capital. In addition, the trader can use their own trading methods, and even trade remotely (from home).

So, in a sense, it <i>sounds</i> somewhat similar to just having a retail account, but instead, using a prop firm allows the trader to have access to trading within a pool of capital, yet somehow keeping their own capital performance separate.

Am I close? Or way off? :D

Thanks!
 
You are close* - hopefully you'll get some more feedback from some more veteraned traders.

i am about 2 years in at this point, and to my knowledge the basic idea of what you've said is correct -- *although, the most important distinction you need to make and not confuse any further (possibly even to not offend a lot of traders) is that retail and what you're calling "prop" are two entirely different things. they are two different BUSINESS MODELS.

Both are created by people hoping to make money by attracting customers, although in a trading firm (in a perfect world) they are trying to build a great team of traders to work alongside, to build a great company for the long term, and make money in various ways.

If you join a company, make sure they are either requiring everyone to become licensed 7 and/or 63's, or are being highly selective about who can come in as partners in the company.
 
Quote from bootize:

Hello,

I read through a lot of the threads relating to prop firms, in addition to other internet searches, but I still just want to clarify what I <i>think</i> I understand a prop firm to be.

If someone was interested in trading a basket of futures markets, but didn't have sufficient capital of their own to trade them all, they could deposit money and join a prop firm. In turn, they can trade the basket of futures markets using the overall prop firm's capital. In addition, the trader can use their own trading methods, and even trade remotely (from home).

So, in a sense, it <i>sounds</i> somewhat similar to just having a retail account, but instead, using a prop firm allows the trader to have access to trading within a pool of capital, yet somehow keeping their own capital performance separate.

Am I close? Or way off? :D

Thanks!
More...

Well you are at least correct in your statement of what you describe as being "similar to just having a retail account". Aside from that what you have described is absolutely NOT PROP ! It escapes me as to why there is still so much confusion on this website about this topic. The PROP in prop trading refers to the capital that is at risk. The funding of the accounts and the losses are proprietary to the firm. That means they own them, the capital that the trader is using and the losses that the trader incurs while trading that capital, period. While the definition of prop firm can be expanded to include some other elements, the root issue is what I just described (who's capital is at risk).
The confusion on this issue arises out of people being willfully blind to the fact, or simply not understanding the fact that when the trader puts his/her capital up it becomes a retail arrangement, regardless of what kind of leverage the trader is afforded. There are lots of firms out there who artfully dodge the issue of retail account status simply by creating a structure where, what are actually glorified retail clients, are called 'prop traders'.
Actual prop firms in the truest sense of the definition DO NOT take trader deposits, or provide excessive leverage, they simply hire, or contract individuals to trade proprietary funds, and then pay those individuals some kind of split based on the traders performance.

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Thanks! Very interesting,

So if a trader joins a prop firm, their performance is in fact separated from the group? In other words, whether a trader puts any money into the prop firm or not, they will be able to track their performance as an individual?
 
a true prop trader you are a employee of the firm,your not required to put up any risk capital to trade and you usually get a salary or % of earned profits. that is true prop, everything else is getting extended leverage with depositing some risk capital, the word prop is used by traders saying i have extended capital to trade with , which most traders need & want. common used word, your a employee of a prop firm, or the use of extended capital, hope that helps .
 
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