How difficult is it to start a prop firm?

Quote from cashmoney69:

How did don start his trading firm?
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Actually my brother started the Firm in 1992, along with a long time friend. I came on board in 1994 I think.

After enjoying and thriving with the "Exchange Floor Trading" business model for a decade or more, we duplicated that model.

When we started we had to buy Exchange memberships, but after doing so we thought it was pretty cool that we could put up a token amount of money, say $20K or so, and then you a $million or more of Spear, Leads, and Kellogg's money (now Goldman Sachs)..., being able to engage in pretty sophisticated trading styles, keep all our profits without having anyone breathing down or neck. All SLK asked was that we run all our trades through them......so, in 1992 we duplicated that model to get economies of scale from the clearing firm, connectivity and other overhead expenses. It worked well, we now have hundreds of traders who use our money to trade with.

And, they don't have to buy Exchange memberships, just pass a licensing exam.

That's pretty much it.

Don
 
Quote from cashmoney69:

So how's business been after 2000?..still printing money ;) ?
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Business is good, quite an upsurge since some accounting changes took place last year that had an effect on other firms. Funny that you say 2000...I ran some numbers, and found that over half our traders have been with since 2000 or before, quite good I would say.

Don
 
How much was an exchange seat in 1992? And a seat to what exchange? NYSE, or a regional?

If you were to buy a seat now, where would you do it and how much would that cost?
 
HI DON, in holding overnite positions, does it always need to be hedged , is it always 10-20-1 etc. , OR can the trader have the option of holding lets say 5 stocks @ 1000 shares each. , low beta, diversified for a directional play, each stock in a different sector, regardless long/short, just a direction per say... with risk parameters that make sense for a swing trade, that is within the buying power allowed for overnites? if a trader can trade freely using common sense with good risk control, OR does all overnites need to be hedged period , regardless of the variables? i am just trying to detemine how much flexability you offer to your traders on overnites... thanks,
 
Quote from scorpion:

hi don, in holding overnite positions, does it always need to be hedged , is it always 10- 20-1 etc. , OR can the trader have the option of holding lets say 5 stocks @ 1000 shares each. , low beta, diversified for a directional play, each stock in a different sector, regardless long/short, just a direction per say... with risk parameters that make sense for a swing trade, that is within the buying power allowed for overnites? if a trader can trade freely using common sense with good risk control, OR does all overnites need to be hedged period , regardless of the variables? i am just trying to detemine how much flexability you offer to your traders on overnites... thanks,
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Sure, we have some (not too many) "directional" types, and they can take home positions (in general with not so good results overall)...but sure.

This is why clearing firms and trading firms have haircut charges.

For example: hedged positions are 6 times equity for free. Naked positions are 1% per month over 2 to one of your equity. You get 2 to one for free, minus interest to Goldman Sachs.

Don
 
HI DON, thanks for your response, its good to see their is some freedom in trading different styles using good risk parameters. from your experience, WHY are their not many good directional, traders in your firm? do most traders lack the knowledge in understanding the markets & stocks they trade, a stock is going up or down, choosing a direction & being profitable is not brain surgery, its how you manage your trades like with every other style that determines you pnl. imo... your thoughts?
 
Quote from scorpion:

HI DON, thanks for your response, its good to see their is some freedom in trading different styles using good risk parameters. from your experience, WHY are their not many good directional, traders in your firm? do most traders lack the knowledge in understanding the markets & stocks they trade, a stock is going up or down, choosing a direction & being profitable is not brain surgery, its how you manage your trades like with every other style that determines you pnl. imo... your thoughts?
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OK, IMO, there is a big difference between trading and investing in general.

If you're putting money from bank interest straight to investing, trying to beat bank interest, that is one thing. If you need to "borrow" capital to invest with, then you have to overcome that percentage before being profitable.

Investors look for ROI (Return on Investment) - passive income, where traders are actively working at their trading. Sure, there is some crossover.

A trader with $25,000 who makes $$5,000 per week...is he really making 20% per WEEK in ROI? Of course not, he's working really hard each day, and the money being used (ours) is just a tool, no different than a computer.

When you find a stock that you want to keep long for days/weeks/months based on fundamentals and technicals, you can probably find an off-setting position to sell short (collecting interest on the short stock sales, which is not paid to retail traders)....thus you're paying considerably less to keep the long position....does that make sense? If you pay 6.75% naked to use money, plus some possible haircut, why not collect 5% interest and get to use more money without haircut.

We, as a family portfolio "hedge fund" are almost always hedged against general market risk, and yet we don't have to use OPM or borrow any money...so, at times we take a shot (the infamous 7000 short GM puts from last year, LOL)...but in general, we're pretty hedged.

Hope that helps a bit.

Don
 
DON, thanks, that makes sense, just different strategies, long/short to capitalize on market movements, intra-day or overnite, i just want to date not fall in love with stocks lol.. the goal is trying to be profitable over the long term in using different strategies... as you have said only day trading is tough.. its using different strategies, over a longer time frame that gives the trader a chance to your positions work in your favor , some breathing room per say, never easy, just try to put the odds in my favor thats all.
 
I still like my idea of an internet cafe where traders come in, grab a seat and start trading. They trade through their own platforms, and pay by the hr for the seat. The edge to this business is that a trader wouldn't need a license to trade there, and the social ability to be around others.
 
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