How do prop firms make money? (And a few more newbie questions)

T

TraderD72

Hi there,

I am looking into trading prop but want/need to have a better understanding of a few things before I move forward.

1. How do prop firms actually make their money? If they payout 100% (as I have heard) to their traders does that mean they are only making money on commisions?

2. In reference to the payout is 100% the norm for prop?

3. What is an above average deal to trade prop? I have heard .004/share and he above listed payout.

4. I have about 10k risk capital so does this factor in to the type of deal I can get?

5. Will the prop firm "lock up" this money and is it guaranteed?

6. I am not looking to hold overnights so how much leverage
should I expect?


What else should I condsider before accepting a deal at a prop firm?
 
You ask a lot of questions but I'm not going to answer them for one simple reason. You don't have enough capital to open an account with a legitimate, reputable prop firm. Think $50K minimum
 
instead of saying here are your answers BUT you need at least 50k to open an account at a good firm you withhold the information that I seek?

Um...ok....wel...Thanks???
 
Quote from TraderD72:

instead of saying here are your answers BUT you need at least 50k to open an account at a good firm you withhold the information that I seek?

Um...ok....wel...Thanks???
More...

Bright Trading which is a prop firm (that advertises here on ET) has a professional named Don Bright.

I would suggest finding his 'opening mornning thread' and post your questions to him. He for sure is someone who has your answers and seems to take a lot of time to answer 'newbe' questions (including my own at times)

In that thread you will find other traders there that seem to be willing to answer questions as well.

To be clear I am a retail trader (although thinking about taking the Series 7 exam to be able to trade through a prop firm) so take what I say with a grain and confirm everything before you act on what my answers are. If anyone corrects me they are probably right.

1. How do prop firms actually make their money? If they payout 100% (as I have heard) to their traders does that mean they are only making money on commisions? -- at 100% payout They make money on commissions like retail brokers do, also the interest earned on your account balance (many will pay you interest as well but I have no idea what they make compared to what they pay out), also ECN passthoughs are another possible way as well as interest earned on your short interest balance.

2. In reference to the payout is 100% the norm for prop? -- I think it depends on if your simply trading your own account and not really 'working' for the firm.

3. What is an above average deal to trade prop? I have heard .004/share and he above listed payout. -- I believe prop firms are going to expect you to trade on average more shares per day than a $10,000 account will allow you to do even with 10 to 1. I would expect you could find sub penny per share though (IB will give you half a penny or less with a retail account)

4. I have about 10k risk capital so does this factor in to the type of deal I can get? -- I cant see how this would NOT be a huge factor. At the same time I dont think you need 50K either from what I understand. But if your profitable and you make it past the 90 day mark you MAY be able to work a better deal or you will naturally find better deals

5. Will the prop firm "lock up" this money and is it guaranteed? -- not sure what you mean by lock up but as I understand it you will NOT have any guarantees (i.e. government investors insurance etc...) so if your prop firm goes tits up you could lose all your money ...... Something to think about before you send that check to the first prop firm that says 'we will take you' and another reason to look at staying with retail

6. I am not looking to hold overnights so how much leverage
should I expect? -- I think intra day you should be able to find at least 5 to 1 with a well know prop firm

side note. I have no relationship with Bright Trading or Mr. Bright other than having some of my questions answered that I directed at him. I do use IB and Tradestation for brokers. All my answers are based on what I believe from looking at going professional
 
Thank you for your answers.

I will find the Bright Trading thread and continue to search and you have helped for sure.

The "lock up" was a period of time that I could not remove the money from their account. i have heard some have a min 1 year period.

Thank you again for your time and help.
 
Quote from TraderD72:

Thank you for your answers.

I will find the Bright Trading thread and continue to search and you have helped for sure.

The "lock up" was a period of time that I could not remove the money from their account. i have heard some have a min 1 year period.

Thank you again for your time and help.
More...

I have no idea but I would guess with the blowout rate of new traders that 1 yr may be a long time to hold money from someone who has been gone and is not coming back.

Like anything though, its all negotiable

Best of luck!!
 
1. How do prop firms actually make their money? If they payout 100% (as I have heard) to their traders does that mean they are only making money on commissions?
Yes, on commissions. If you find a prop firm not passing on all ECN rebates/charges at cost then you are being skimmed and they are adding to their bottom line. Making money on interest is minimal for prop firms. Assume you have 10k down as in your example. Do the math

2. In reference to the payout is 100% the norm for prop?
100% is not "normal" but some firms do offer this structure. Obviously this will have an impact on the commission structure compared with a lower % payout. Some firms will start out with 35% structure with very low fees. The trick is to find a pay structure in the range that allows your trading style to make money.

3. What is an above average deal to trade prop? I have heard .004/share and he above listed payout.
Paying .004 per share is murder. Trading prop allows for LOW rates not this retail trading rate garbage. Cut that at least in half for a complete newb trader. Again dependent on % payout.

4. I have about 10k risk capital so does this factor in to the type of deal I can get?
Equity varies from firm to firm. Some ask for 0 and some will require a minimum value. It is all about leverage...if you put down only a few thousand then your BP will be limited. This is something to think about. Putting down 10k should get you from 100- 250k BP. Just make sure your trading style and BP match up. Nothing worse than being undercapitalized. Having 10k will suprisingly not have that great of an impact on your trading deal.>>

5. Will the prop firm "lock up" this money and is it guaranteed?
Your money is NOT guaranteed. This is why you should troll the elite boards, call the firms directly and ask questions about firms before putting out a penny. The number of blown up LLC's is staggering and everyone here trading for more than a year has a story that is startling. This is why reputation is important. Your money should not be "locked up" and you should be able to request a payout anytime you like similar to a bank. It makes sense to keep payouts bimonthly similar to a job. Also, if you have equity down allowing your equity to grow will build your BP so this is something you should also think about. When an account is closed then there should be no more than a 1 month delay. ECN charges and other exchange fees are not invoiced to firms until the next month so money usually rests in the account until the administration is taken care of. Anything more than 3 months and you should be chasing the firm down.

6. I am not looking to hold overnights so how much leverage
should I expect?
Some firms will allow overnights but almost all will shy away and either drop equity to 1:1 or not at all. Starting out leverage will be different from your leverage after trading for a period (weeks/months). It takes time to learn the risk control of a trader and the degree of their standard deviation, share size, stock selection etc.


What else should I condsider before accepting a deal at a prop firm?
Reputation, Software reliability, backoffice assistance, other traders there are profitable? How long have traders stayed at the firm? How long has the firm been around? How many times has the firm changed its name !? (laughs) Remote or in-office trading? Are they open about passing on this information or do they delay? DO YOUR DUE DILIGENCE....again....DO YOUR DUE DILGENCE

Hope some of this helps.
 
you should get paid whenever you like. maintain a payment schedule that is similar to a regular job.;ie.weekly or bi weelly payments.
be wary of a firm that requires a one year holding period.
 
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