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How do prop managers decide buying power
- Thread starter giggollo
- Start date
Quote from giggollo:
How do prop firm managers decide how much buying power to grant a trader, and whether to grant a request for more buying power or not...what specifically do they look for? Would be great for some prop firm managers to comment on this...
We focus on "what" the trader is doing rather than "how much" money he is using. For example, a standard trader would be able to "use" a $million or more for "opening only" strategies, pairs, mergers, market making, etc., but if he wanted to short 10,000 GOOG, no way.
Our best traders are generally hedged in one way or another, so the overall market risk is generally less than it appears by just looking at the overall dollars.
Don
Interesting..so why is it important at all if the trader is making money or not...take 2 situations:
Trader A trades for 6 months, ends up breakeven after commissions
Trader B trades for 6 months and makes $100K after commissions
Assume both traders put up 20K and never lose more than 1K on a single day during this period
As a prop manager, why would you give Trader B more BP to use than trader A?
If both are taking the same "level of risk" in terms of the "what" as Don calls it, (ie generally not taking too many one-sided bets or overnights, and being hedged), why does it matter if the trader is making money or not? Even if the trader is losing..if his intraday p/l swings are small compared to his deposit, why would the question of whether he's making money or not affect your decision to grant him more BP?
It would also be interesting to hear from traders who requested BP but were turned down, and the reasons cited for not giving more BP. Come on guys, fess up..
Trader A trades for 6 months, ends up breakeven after commissions
Trader B trades for 6 months and makes $100K after commissions
Assume both traders put up 20K and never lose more than 1K on a single day during this period
As a prop manager, why would you give Trader B more BP to use than trader A?
If both are taking the same "level of risk" in terms of the "what" as Don calls it, (ie generally not taking too many one-sided bets or overnights, and being hedged), why does it matter if the trader is making money or not? Even if the trader is losing..if his intraday p/l swings are small compared to his deposit, why would the question of whether he's making money or not affect your decision to grant him more BP?
It would also be interesting to hear from traders who requested BP but were turned down, and the reasons cited for not giving more BP. Come on guys, fess up..
The firm thinks about risk to themselves first and foremost. You may have a system that has proven itself to have drawdowns and down days in line with your account balance. BUT what if you make a mistake? What if your automated macro goes into an infinite loop and runs up 100x the positions you intended? A lot of bp is enough rope to hang yourself with if things go ugly. And once your money is gone, you're into the partners money, and they don't ever want that to happen.
Not all firms are a Bright Brothers with bottomless pockets to handle unlimited positions firm-wide. Lots of bp to too many traders could put the firm into a margin call situation with their clearing firm on a busy day.
Those are two situations not usually considered by the traders asking for millions of dollars.
Not all firms are a Bright Brothers with bottomless pockets to handle unlimited positions firm-wide. Lots of bp to too many traders could put the firm into a margin call situation with their clearing firm on a busy day.
Those are two situations not usually considered by the traders asking for millions of dollars.
Quote from lescor:
The firm thinks about risk to themselves first and foremost. You may have a system that has proven itself to have drawdowns and down days in line with your account balance. BUT what if you make a mistake? What if your automated macro goes into an infinite loop and runs up 100x the positions you intended? A lot of bp is enough rope to hang yourself with if things go ugly. And once your money is gone, you're into the partners money, and they don't ever want that to happen.
Not all firms are a Bright Brothers with bottomless pockets to handle unlimited positions firm-wide. Lots of bp to too many traders could put the firm into a margin call situation with their clearing firm on a busy day.
Those are two situations not usually considered by the traders asking for millions of dollars.
Excellent post Corey!
The amount of BP a trader is alloted is a function of many variables. However, I think one of the things that is often overlooked by many traders is the risk that having significant BP represents. It is one thing to entrust millions of dollars to what a prop firm may consider sane, rational, responsible individuals, but it is a whole different story when one looks at the risk of exogenous variables.
Traders should have BP that suits the performance and the strategy that they employ but far too many traders seem to think that they require far more BP then they actually use. It is imperative for all parties to understand the risk that excessive unused BP represents in a traders account. We have all read (and probably laughed about ) the fat finger mistakes made by some hapless trader at some major bank that results in millions of lost dollars. If you are like me you probably also ask yourself the same question " how the f_ck did that guy screw up an order that bad"? Well most platforms are capable of rejecting orders that exceed the trader's BP, but not too many platforms are capable of determing when an order quantity is just a keystroke error, so if you have the BP, you'll own it, and it is rarely a mistake in the right direction. Not to mention what could happen under the hood if some glitch occurs in a program or algo. that could run you out to the end of your BP in a hurry. All of the sudden all that extra BP in your account that seldomly ever gets used, just got used!
:eek:
Quote from giggollo:
Interesting..so why is it important at all if the trader is making money or not...take 2 situations:
Trader A trades for 6 months, ends up breakeven after commissions
Trader B trades for 6 months and makes $100K after commissions
Assume both traders put up 20K and never lose more than 1K on a single day during this period
As a prop manager, why would you give Trader B more BP to use than trader A?
If both are taking the same "level of risk" in terms of the "what" as Don calls it, (ie generally not taking too many one-sided bets or overnights, and being hedged), why does it matter if the trader is making money or not? Even if the trader is losing..if his intraday p/l swings are small compared to his deposit, why would the question of whether he's making money or not affect your decision to grant him more BP?
It would also be interesting to hear from traders who requested BP but were turned down, and the reasons cited for not giving more BP. Come on guys, fess up..
P & L is a consideration for a very basic reason. No profits, not much longevity...he's going to be "gone". No one can keep trading "break even" for very long.
We only thrive if our traders make money and keep trading for the long term. We start most out about the same with share limits of 5,000 per stock or 10,000 aggregate..."seasoned" traders get higher limits of course.
Don
lescor/automate: i imagine the possibility of "making a mistake" is always there for all traders, but why would a firm give one trader 100x and another 10x is the question..both traders could theoretically make the fat finger mistake, though the firm may perceive that one trader is less likely to do that than another (subjectively that is, assuming neither trader has actually made such a mistake while with the firm)
don: yes the whole question is what makes a "seasoned" trader seasoned...specifically, what *objective measures*..does it really matter to the firm from a "risk to firm capital" point of view whether a trader will be gone in a year? Suppose two remote traders get allocated the same BP, and after a year one has made good money and stays on for next year, the other one depletes his own account and leaves...during that year neither has endangered the firm's capital more than the other (in terms of small intraday p/l swings), and i imagine that if the losing trader wanted more BP at the end of that year, why not give it to him, as long as his intraday p/l swings are nowhere near endangering firm capital?
How much of the manager's decision is subjective and how much of it is objective...
don: yes the whole question is what makes a "seasoned" trader seasoned...specifically, what *objective measures*..does it really matter to the firm from a "risk to firm capital" point of view whether a trader will be gone in a year? Suppose two remote traders get allocated the same BP, and after a year one has made good money and stays on for next year, the other one depletes his own account and leaves...during that year neither has endangered the firm's capital more than the other (in terms of small intraday p/l swings), and i imagine that if the losing trader wanted more BP at the end of that year, why not give it to him, as long as his intraday p/l swings are nowhere near endangering firm capital?
How much of the manager's decision is subjective and how much of it is objective...
An experienced profitable trader may have any number of things go wrong, but.....they know how to handle the situation. I have had system blow ups that filled me on 400k shares of stock. I've had key stroke errors that sent the wrong order type. Took me an hour, but I traded out of it, lost about a grand. I was able to mitigate the loss because I had a preplanned response, I didn't panic, and I followed my plan. It has been my experience that many newbies will freeze, and not take any action.
Quote from mschey:
An experienced profitable trader may have any number of things go wrong, but.....they know how to handle the situation. I have had system blow ups that filled me on 400k shares of stock. I've had key stroke errors that sent the wrong order type. Took me an hour, but I traded out of it, lost about a grand. I was able to mitigate the loss because I had a preplanned response, I didn't panic, and I followed my plan. It has been my experience that many newbies will freeze, and not take any action.
Yes, Gig...MSchey is correct...we are a lot less concerned with a trader who has shown control and expertise over the years. A "risky" trader will not receive the same support from us.
Don