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

Quote from mcelitetrader:

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.
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I agree with most of this except the part about rates. If you find the other things you're looking for, .004 isn't a bad rate for a brand new trader. I'd actually be a little hesitant of anyone offering sub .002 for someone with zero experience. Pretty good advice overall though.
 
it is beyond me why a beginning trader should trade beyond 4:1 leverage. it is almost a guaranteed way to blow out the entire account.

what firm in its right mind would give a beginning trader .004 and desk space without a deposit?
 
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.
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No "lock up" of capital here. You can certainly feel free to send questions to: donbright@brighttrading.net or simply give me a call to chat: 702.739.1393. Might be easier for both of us, LOL.

Don
 
I wanted to add to the comment on how a prop firm makes money. Not only commissions but also monthly desk charges, training fees (i.e. continuation education) and seminar fees. As far as commissions go, 0.004/share is actually pretty good for a newbie. If you can't make money with this, then cutting it in half won't really do you much good. As a newbie, learning proper trading strategy is far more important than what your commission are. I learned to make consistent money when my commissions were double this amount back in 2000 and the market was choppy and trending down. If anything, high commissions taught me to pick my spots carefully and be patient. Super low commissions tend to encourage churning, shot taking and impatience which fosters bad trading.

Low commissions are a double edged sword for newbies (and many veterans) because they don't learn the true value of a trade. It's not the number of shares you trade but the quality that counts. I've known traders that did 50,000 shares a day that blew the pants off of other traders doing ten times that volume per day. Off course, prop firms would much rather have the high volume jocks anyday.

Again, don't worry so much about your commission rate. Look for a solid mentorship program with active, profitable traders who you can learn from.
 
Quote from 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?

Commissions, desk fees and some charge interest for shorts rather then pay them.

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

This really depends on the prop. If you want 100% then dont expect any training or strats to start you off. 100% payout means you are 100% on your own.


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

Very volume dependent. Higher desk or lower payout may equal lower commissions. But you got to understand that a prop has to make money, so lower commissions will be made up somewhere.

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

Yes, you can stilll get a deal with a prop. With that little capital, probably desk fee(fixed expenses) are the most important to you.

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

Well that depends on how the prop is structured. Ifs a JBO then you might have to lock up capital for a year. This really depends on the Prop. But do not expect getting your money out as a retail account.

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

In my experience its more about haircut then leverage.


What else should I condsider before accepting a deal at a prop firm?
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My final thought is that with such a low starting capital you should focus on getting the fixed expenses as low as possible. Avoid training fees and inflated desk fees. The last thing you want is to have to make 10% per month just to break even.

Also make sure the software is suitable for what you are planning to trade.
 
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