How Do These Guys Make Money?

[Ghost of Cutten]

Quote from lescor:



In the other model the firm will let the trader trade for close to it's cost of transactions and make money on a profit split with the trader. The trader may or may not put up any of his own money. They can take on inexperienced people and throw them into the market with minuscule risk parameters. They either start to produce and get a bigger line to work with or they are let go. The firm risks very little but makes it all up from the guys who turn out to be good.

Why wouldn't the good ones just leave as soon as they become successful?

 

[LeeD]

Quote from Ghost of Cutten:

Why wouldn't the good ones just leave as soon as they become successful?

As a part of a prop firm a trader still gets lower commissions and likely more leverage than retail + a firm may offer a ton of other benefits: better support from broker or even directly from the exchange, tax-efficient re-investment of profits, free health insurance, a small salary for "bad" months, office to come to where one can interact with other people etc. It's not cheap and it's a big operation to get all of this for a stand-alone trader. Aslo it's not everyone's cup of tea to run a whole business to support trading.

Naturally, beginning traders who have made a jump to significant profitability shop around for a better deal but then top prop firm are there in part thanks to willing to offer deals that keep the top talent.

 

[lescor]

Quote from Ghost of Cutten:

Why wouldn't the good ones just leave as soon as they become successful?

If you ask me, they should. Unless they are getting some worthwhile benefits they can't get elsewhere, OR they have a strategy that doesn't work at more traditional commission rates. If you are making money trading 50,000 shares for twenty cents, there's a good chance that won't work paying a per share rate.

 

[businessstaxes]

the easiest way to make money in wall street is the management fee and commission model. the broker or management company has NO RISK.

a fund with 100 million with 2% managment fee is 2 million in fees. brokers have no risk either.

prop firm model is just like retail trader playing the market.
prop firm have risk and risk is 'participating' in the market.
prop firms or market makers are 10:1 leverage and mostly daytrading..they don't hold positions overnight. some market makers do but it;s hedged.

reason brokers/banks got into prop trading was it's more profitable but more risky..and you are always taking the otherside of the trade of the client.

the answer proptraders are just retail clients no different prop traders are market participants.

Quote from CrazesSOB:

Hi,

I am a retired mutual fund manager that is looking for a flexible job to keep busy. It has been over 5 years since I left and I truly miss the market now. I really want to trade my own account, but can't since my wife has a senior job with a WallStreet firm and they heavily restrict both our accounts. A friend has told me that I should consider a Prop Trading firm as a solution. I looked at a few websites and I have one question.

Here is the question. How are these firms making money? I am suspicious of anyone with brains who hands out capital to pretty much anyone who applies and makes it through the training period (markets are so random that some WILL succeed no matter what). And why are they continually recruiting people?

Based on my years on the trading floors of two major investment banks, I noticed that on Wall Street: 1) Firms do not like to day trade unless it is in the context of market making for their sales force. The reason is that intraday trading is quite random...without an information advantage.
2) They NEVER use their own capital unless it is pretty much a sure thing (arbitrage, legal insider info, etc).
3) Their proprietary trading departments try to have as few traders as possible. They find a few guys who can trade, and then they allocate their capital to them.

The small prop firms out there seem to be doing the opposite of all three. There must be some other way they are making money.

Before I even call one of these firms up, I just want to know.
Can any vets out there tell answer my question?

 

[peilthetraveler]

Quote from CrazesSOB:

Hi,

I am a retired mutual fund manager that is looking for a flexible job to keep busy. It has been over 5 years since I left and I truly miss the market now. I really want to trade my own account, but can't since my wife has a senior job with a WallStreet firm and they heavily restrict both our accounts. A friend has told me that I should consider a Prop Trading firm as a solution. I looked at a few websites and I have one question.

Here is the question. How are these firms making money? I am suspicious of anyone with brains who hands out capital to pretty much anyone who applies and makes it through the training period (markets are so random that some WILL succeed no matter what). And why are they continually recruiting people?

Based on my years on the trading floors of two major investment banks, I noticed that on Wall Street: 1) Firms do not like to day trade unless it is in the context of market making for their sales force. The reason is that intraday trading is quite random...without an information advantage.
2) They NEVER use their own capital unless it is pretty much a sure thing (arbitrage, legal insider info, etc).
3) Their proprietary trading departments try to have as few traders as possible. They find a few guys who can trade, and then they allocate their capital to them.

The small prop firms out there seem to be doing the opposite of all three. There must be some other way they are making money.

Before I even call one of these firms up, I just want to know.
Can any vets out there tell answer my question?

Commissions.

The last prop firm I was at was charging me about $3,000 per month in commissions and they had hundreds of people there. (You do the math). You also pay your own SEC fees at a prop firm (currently $19.20 per million dollars sold) You can expect to pony up at least a few hundred dollars per month in SEC fees at a prop shop.