Gifted trader: Andy Priston

[Swan Noir]

Given the amount of "retail" leverage available in futures unless people are trading spreads or other hedged positions what can a prop shop provide? It is inconceivable to me that another layer of leverage could be added.

Unless the deal is outright directional traders need not apply i don't see how this is even possible without blowing up the shop.

Quote from gmst:

I enjoyed this thread - informative.

I have a question however. I know equity 'deposit' prop shops like Bright, Echo etc. are interested in commissions as they do get lower commissions than they pass on to their traders. So more churnout means more commissions for them.

However, how does it work for futures prop shop. All my information suggests that futures prop shops back traders with their own capital and want them to make money. You are rewarded PnL wise and the idea is not to churn commissions. Can you please explain this ? Also, do those futures prop shops have access to much lower commissions compared to what they pass on to the traders? Thanks for sharing.

 

[gmst]

Quote from Swan Noir:

Given the amount of "retail" leverage available in futures unless people are trading spreads or other hedged positions what can a prop shop provide? It is inconceivable to me that another layer of leverage could be added.

Unless the deal is outright directional traders need not apply i don't see how this is even possible without blowing up the shop.

This logic is flawed. Consider a very modest scenario - someone spent 3 yrs becoming a consistent futures trader. Now his account is at USD 25k. He wants to trade 1 ES contract for every 10k in his account and with this leverage he will be able to return 100% return in a year. Assuming he is doing it for living, he will have to take out money periodically for living - so lets say he won't be able to compound. In first year he will make only 25k, trading 2 contracts. Whereas if he is able to join a prop firm, and the firm gives him a limit of 40 contracts on a 50-50 split, he will be able to make 500k total and 250k for himself.

 

[Swan Noir]

So his conservative construct of one contract per 10K gets traded in for 40 contracts on his 25K of equity. What happened ... he went from riding a bicycle with training wheels to a turbocharged formula one?

Or does the firm allow him to draw down their capital while his is exempt from loss? Do we think that is a common prop business model? That's not my understanding of the pecking order on the losses ... is it yours?

Quote from gmst:

This logic is flawed. Consider a very modest scenario - someone spent 3 yrs becoming a consistent futures trader. Now his account is at USD 25k. He wants to trade 1 ES contract for every 10k in his account and with this leverage he will be able to return 100% return in a year. Assuming he is doing it for living, he will have to take out money periodically for living - so lets say he won't be able to compound. In first year he will make only 25k, trading 2 contracts. Whereas if he is able to join a prop firm, and the firm gives him a limit of 40 contracts on a 50-50 split, he will be able to make 500k total and 250k for himself.

 

[gmst]

Quote from Swan Noir:

So his conservative construct of one contract per 10K gets traded in for 40 contracts on his 25K of equity. What happened ... he went from riding a bicycle with training wheels to a turbocharged formula one?

Or does the firm allow him to draw down their capital while his is exempt from loss? Do we think that is a common prop business model? That's not my understanding of the pecking order on the losses ... is it yours?

40 contracts are not on his 25k equity.

In 'proper' futures prop model context, trader doesn't put up any capital. So 25k is irrelevant. All losses and profits are borne by the firm. Firms generally pay a salary (small) and a profit %age. Hope that is clear.

This is the most striking difference between prop equity and prop futures firms. That is why I said I was surprised when I heard that traders at Refco were encouraged to churn their accounts. It didn't make sense to what I know about futures prop firms business models.

 

[traderchi128]

Quote from cornixforex:

Very interesting info, Traderchi and nice to hear someone still makes really big money by old school outright trading.

I know plenty of guys doing very well outright trading. Not sure why some people say that the only way to make money is spreading...pairs....

Those strategies work well when the right person is trading them......just like outright trading. At the end of the day it's the trader who is responsible for making the money. I have seen plenty of guys blow up trading spreads due to lack of discipline/refusing to take a loss.

I have been trading for 20 years now....the characteristics that made traders great were the same back then as they are now. Sure it's tougher and you have to work much harder than the 90's....but trading is trading. Back then you needed the following:

1) A good strategy
2) Discipline
3) No ego/admit when you are wrong
4) Excellent risk management
5) Patience
6)Ability to be aggressive when the set up/trade is there.


Guess what....20 years later it's the same damn thing. Old school outright trading worked then...and it works now.

 

[traderchi128]

Quote from gmst:

I enjoyed this thread - informative.

I have a question however. I know equity 'deposit' prop shops like Bright, Echo etc. are interested in commissions as they do get lower commissions than they pass on to their traders. So more churnout means more commissions for them.

However, how does it work for futures prop shop. All my information suggests that futures prop shops back traders with their own capital and want them to make money. You are rewarded PnL wise and the idea is not to churn commissions. Can you please explain this ? Also, do those futures prop shops have access to much lower commissions compared to what they pass on to the traders? Thanks for sharing.

Some Equity firms do get lower commission for their guys because of all the volume they do, but they don't pass on all the savings. Some don't pass on any to their traders. These firms make most of their revenue from commissions....especially the ones like Bright that have deposit only traders. It's a great gig...they take no risk...get a small % of profits (10-20%) and rake in the commissions.

As far as futures shops that back guys (Mac/Refco). Their "real" goal was to limit risk and have their guys go for small profits/take no risk on each trade. That way the trader could gross small profits each day, which the firm would then take out the commissions. Ideally the owners of Mac/Refco were psyched at the end of the day when the whole room was flat Net P/L (Profits -commissions). They weren't in the business of taking risk/going for bigger profits. They knew the safe way out was small profits/low risk/collect commissions.

Refco did have very very low rates which enticed guys to trade a ton....which they needed for their model to work. Once they had their traders afraid to take risk/give positions no room (I was told to trade the ES giving them 2 ticks at most....most of my trades should be scratches...very rarely should I take a 2 tick loser or have more than a 2-3tick winner) they would give them huge size to trade knowing these guys would scratch a ton..have a few losers and a few winners....and then have a good part of their P/L returned to the firm in the form of commissions.

Over the course of time Refco traders made little to nothing Net Wise. Gross Wise they did, but most of that got eaten up by commissions.

 

[quannabe]

Quote from traderchi128:

Some Equity firms do get lower commission for their guys because of all the volume they do, but they don't pass on all the savings. Some don't pass on any to their traders. These firms make most of their revenue from commissions....especially the ones like Bright that have deposit only traders. It's a great gig...they take no risk...get a small % of profits (10-20%) and rake in the commissions.

As far as futures shops that back guys (Mac/Refco). Their "real" goal was to limit risk and have their guys go for small profits/take no risk on each trade. That way the trader could gross small profits each day, which the firm would then take out the commissions. Ideally the owners of Mac/Refco were psyched at the end of the day when the whole room was flat Net P/L (Profits -commissions). They weren't in the business of taking risk/going for bigger profits. They knew the safe way out was small profits/low risk/collect commissions.

Refco did have very very low rates which enticed guys to trade a ton....which they needed for their model to work. Once they had their traders afraid to take risk/give positions no room (I was told to trade the ES giving them 2 ticks at most....most of my trades should be scratches...very rarely should I take a 2 tick loser or have more than a 2-3tick winner) they would give them huge size to trade knowing these guys would scratch a ton..have a few losers and a few winners....and then have a good part of their P/L returned to the firm in the form of commissions.

Over the course of time Refco traders made little to nothing Net Wise. Gross Wise they did, but most of that got eaten up by commissions.

So... out of curiosity, which firms are truly in it for the PnL?

 

[traderchi128]

Quote from quannabe:

So... out of curiosity, which firms are truly in it for the PnL?

I'm not going to name names on here. But I would say very few are in it for P/L. The prop firms that have people put up money and payout 90% have little interest in P/L. Their incentive is to get guys to be active traders. If the traders blow out, the firm has zero risk. A lot of ones nowadays are actually telling people to put up 5000 to trade. Let's be real...nobody can make any real money trading that size...all they will do is churn away their 5000 over time to the prop firm in commissions.

The larger firms that back guys have much more incentive for guys to make P/L. But even some of the ones that have been around have changed their tune and are trying to get guys to trade smaller priced stocks with huge size. Less risk, more commission.

 

[Swan Noir]

How many firms are there that are willing to do a 50/50 (your number) with no capital up from the trader? It simply sounds too skewed toward the trader's interest and a very high risk business model.

If those type of deals are available and if a trader thinks he is ready to move from one contract to 40 (or even 10 as a start) any trader working on small capital should run, not walk, toward that chair.

Quote from gmst:

40 contracts are not on his 25k equity.

In 'proper' futures prop model context, trader doesn't put up any capital. So 25k is irrelevant. All losses and profits are borne by the firm. Firms generally pay a salary (small) and a profit %age. Hope that is clear.

This is the most striking difference between prop equity and prop futures firms. That is why I said I was surprised when I heard that traders at Refco were encouraged to churn their accounts. It didn't make sense to what I know about futures prop firms business models.

 

[gmst]

Quote from Swan Noir:

How many firms are there that are willing to do a 50/50 (your number) with no capital up from the trader? It simply sounds too skewed toward the trader's interest and a very high risk business model.

If those type of deals are available and if a trader thinks he is ready to move from one contract to 40 (or even 10 as a start) any trader working on small capital should run, not walk, toward that chair.

To be honest, I don't know names of any firms that will do such a deal. However, I do see 100% economic justification to have such a business model for a firm- especially when traders are coming in with astonishing track records (let us say PF > 1.8 or Sharpe > 2 and 10 months positive out of 12). Imho, it makes complete sense for the firm to actually encourage such traders to increase their size from 40 contracts to more than 100 contracts (e.g. for ES which can take a lot of size). Agreed, such firms might then offer only 20-30% of the PnL to the trader and keep 70%. In spirit, this is the way locals used to back new people back in the day when most of the trading was in pits.

It will be great if traderchi128 can shed some more light on such business model.