Futures trading at a Prop House in London

B

Bhutan

I am a 20 year old about to leave a top university where I fully expect to get a 2:1 or a 1 in Mathematics. I have successfully applied to the top tier investment banks with a view to becoming a trader.

My older brother ( a lawyer by profession ) has a best friend Mr X in his late 30's who I know quiet well who has become a VERY successful trader on Eurex , and now has gone to work for a Hedge Fund.

Mr X is of the belief that a 21 year old who has potential would be better off going to a Prop House than going through graduate induction at an Investment Bank.

remuneration vs Security is the name of the game as he says. The first few years at a bank will be much more contained financially than as a local I have been told.

It is well documented that young traders at some Prop houses get 70% + of their profits with no liability for losses, and size 000's lots of futures in Eurex fixed income products.

Given the above I seek advice from all other locals at Prop Houses on which are the best ?

Mr X has given me a list of 15+ to apply to , but he advises going to a place that does not boast of the size that a given trader trades but one where I will learn how to trade the 'whole curve'.

He says many places are too speculative , and like all jobs you have to serve your apprenticeship. Apparently many young locals have made a lot one year and then dropped the lot next year and more.

I seek to have a long and profitable time in the industry and as far as I can see am fortunate to get some good advice before jumping in with both feet. I also think it would be smart to gain more than one point of view.

I thoroughly appreciate any replies and all advice given.

Thanks
 
DO NOT DO IT. GO TO AN I. BANK.

You may well be useless at prop trading. Your degree is irrelevant. I know a lot of people with amazing degrees from Oxbridge who failed at this game.

The massive downside is that once you have prop trading on your CV you will no longer be employable in the city. Believe me - it's competitive out there, and there is no bigger stain on your CV than prop trading. Employer's will take someone of equal experience, and no prop trading on their CV over you.

If you can get into an I.Bank do it. The pay and hours may be lousy for a few years (believe it or not though you can survive on the starting pay in london for a few years!), but the fact that you have this on your CV is extremely valuable.

Prop trading will always be there. You can come into it in a few years if you hate life at a bank. However you can't, and I emphasise CAN'T, go from prop trading into a bank environment - you will be stuck with it - and there is absolutely no guarantee of success in prop trading, whatever your qualifications. You will be on the same level as the essex barrow boy who, if he is lucky, has a GNVQ in Ford Escort's!!!!
 
I have to agree with squadron leader. An i bank position will give you exposure to a world of possibilities beyond directional trading. You will learn about how to structure deals and identify market opporunities which will benefit you no matter what happens in the future. Take the ibank gig and spend your nights developing trading systems. It will probably take you a few years to find a profitable strategy anyway.

Runningbear
 
Choosing a prop firm over an i-bank is like saying you've considered a job as chief polisher to Eva Longoria's nipples but decided to do teaching instead.

for the following reasons, in poker dictum:

1. Pot Odds
Ask your friend Mr X how many of his graduate group at the prop firm were fired or left within the first 2 years? Probably over 50%
At a bank it would be more like 1 in 10
Ask him how many of his graduate group are now making seven figures trading futures? Probably just him.
Your odds of success at a prop firm are titchy compared to at a bank.

2. Pot Size
Yeah sure, good prop traders take home 70% approx of their p/l. But their p/l is pathetic compared to bank traders. A bank flow trader makes 6 ticks per trade average - our monthly volume for Jan 07 was 5,200,000,000 euros, and that's just the corporate desk, you're the mathematician, work out that p/l and ask Mr X if he makes that much in a year.

3. The Cards in Your Hand.
At a prop firm you can only trade very short term, with small stops, small profits and a very narrow perspective. At a bank the long term trading style and ultra wide product suite is more accomodating and therefore you are more likely to find something you can play with.

I don't agree with the statement that prop traders are snubbed in the City, but I do completely disagree with any claims that prop traders make more money than bank traders, and if they do, they are 1 in every 100.

At a prop firm your maths skills will also be as wasted as the popes balls - because prop futures is playing computer games for (temporary) living: no brain necessary.
 
Quote from Bhutan:

I am a 20 year old about to leave a top university where I fully expect to get a 2:1 or a 1 in Mathematics. I have successfully applied to the top tier investment banks with a view to becoming a trader.
More...

I'll cut to the chase.

YOUR QUALIFICATIONS
I have got a 1st in Mathematics and Economics from a top 10 uk uni and, honestly, it really doesn't mean that much. What it does give you is the confidence to believe that no matter how hard/confusing something may seem, you will figure it out in the end. I thought that having a great academic background would really speed things up, but once you are in the door (at prop or IB) I'm afraid you are nothing more than a drone so don't hang your hat on living off an academic reputation.

PROP v IB
Although your brother's friend is right in that you can earn more in a prop house in the long haul (considerably more and for a lot less hours) the thing is that it truly is more of a risk to your cv than you might believe.

I emigrated to Australia from the UK (having traded prop and loved it) thinking that it would be easy to find a gig doing similar here and picking up where I left off. Without going into it. I underestimated how few places offer prop out here and also the impact of the funny hours I'd have to be awake to trade markets I'm comfy with. Anyway, for now I'm back in a 'real' job and even the Aussies don't recognise prop traders and that is saying something! Luckily, I worked for Merrills/Chase before trading prop and I do know my stuff so it hasn't been hard to get into something interesting but if I had gone straight from uni to prop, I would look like a serious schmuck right now, wondering how it all went wrong.

Thing is, I'm sure you're confident and keen to work hard until you get it right, but the number of people that truly have the temperament and attitude to trade full time is limited. You can also shove whatever academic ability you have up your @rse as far as I'm concerned- borderline irrelevant if trading prop unless you want to program or act like a quant.

If you trade prop and don't like it, can't make money or simply run out of money before you get consistently profitable, you wont be a hotshot guy who just graduated taking on the world anymore. What you will be is someone who is mid 20s, no real working experience and knows nothing other than playing a computer game that he couldn't master. Those grad schemes or entry positions wont be yours for the taking, I'm afraid.

I love prop and I want to get to the point where I simply trade at home within 5 years or so. However, knowing what I know now, I would definitely not go straight for it fresh out of uni. Too big a risk to your cv- moreso than your bank balance as you are young enough to not give a toss about how much of someone else's money you lose.
 
Would contest that prop shops damage your CV all that badly.

most of the people I used to work with are now at places like Morgan Stanley, JPMorgan, Merrills, Dresdner, Mitsubishi, Bank of China, HSBC, ABN Amro, etc working as analysts. Not too bad really. The remainder found it very easy to get jobs at other prop firms.

It depends on whether you're salaried or not I think.
 
The best possible method:

1) Apply at the best I banks.
2) Bargain for the best salary
3) Work hard during the day - no browsing, no chatting, no idle search for anything other than trading info.
4) Use the time saved due to hard work (yeah, i know I bank hours)
5) Trade 1-1/2 hrs a day
you get the best of both worlds.
 
Firstly thank you for all your replies and time , effort spent.

When you all talk about ' playing computer games ' I assume this is the same as Mr X has told me about traders going outright in size making loads and losing loads on any given day. Which even to a novice seems a bit of a dodgy strategy. At a prop firm you say you can only trade very short term, with small stops, small profits and a very narrow perspective. Again a bit of a dodgy strategy it sounds like.

Mr X has said to apply to the places that trade like investment banks, i.e Fixed Income spreads both intraday and with a longer time view.

I now know of at least two Prop Houses that are run like this with a view trading like Investment Banks , and are run by successful ex-bank traders who apparently according to people Mr X knows are more than happy with their lot.

What I am curious to know is what sort of pay I would get at a bank over the years, then surely it can be calculated what % chance I in theory have of success at a more advanced Prop House.

Any replies as always are appreciated.
 
By going to an IB you're getting a look inside the market that could set you up for life. Investment Banks have clients that you would trade with - you get to see how the real money (big funds, hedge funds, governments and everyone else in between) actually operates. Say you actually turned out to be one of those 1 in 1000 people [warning: made up statistic] who attempt professional trading who turn out to be natural traders: you forego a little bit of earning power in the short-term by going to an IB but essentially that money "lost" you have actually used to buy a long-term protective put option on your future career. It's a tiny cost for what could otherwise be a great deal of anguish.

But if you must - this months Trader Monthly has some numbers. Lets say you get a trading job in Equity Derivatives. That's trading OTC derivatives with clients and hedging using listed derivatives/stock on the exchanges. The products you trade with clients could be simple puts and calls but could also go all the way through to this for example: http://www.risk.net/public/showPage.html?page=343529
which is extremely computationally intensive to value. The guys who trade this kind of product use server farms of several 100s of machines.

Your income projections could be (base salary, first then + bonus range):

Associate (1-3yrs): £50k, £87k-£112k
VP: £62k, £175k-£225k
Director: £75k, £500k-£600k
MD: £100k, £700k-£800k

I have no reason to doubt these although I'd think your first year would be more like £50k rather than £160k. The upper limits are not really true because if you are that 1 in 1000 natural trader then you would be spotted by a senior trader and taken off to a hedge fund in a couple of years.

The average intellectual fire-power in a bank will be higher than a prop shop - you will likely meet interesting and very talented people that you can learn from. You will likely find in some circles you are the stupidest quantitative person in the room even if you have a 1st in Maths and a huge IQ.
 
Bhutan, I wanted to see what you did decide on finally, I am in a similar situation and the difference now is that the job market is really different to 2005!!!

I did trade with a prop house which was a valuable experience but the funny thing is that now my own mentor is telling me to go look for a job at a HF/IB since they will be able to support me better and provide better capital. This happened after I told them that I have desinged my own systems and want to trade them but unfortunately they only do discretionary trading.
 
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