How much do traders earn?
- Thread starter Hawkeye23
- Start date
I will of course refer my friend to this thread for all these terrific comments. Thank you.
I think it would be very hard to get audited financials for a private firm like this. Hopefully my friend would be able to contact some non-management employees to get more reliable info, although I don't know that the incomes of the various traders would be generally known even within the firm.
I was interested in lescor's comment that "those average incomes are probably going to come down a lot as volatility and volume dries up." I understand that volume is helpful in providing liquidity for traders. But what is a trader ideally seeking in terms of volatility? Is volatility without some kind of discernable pattern helpful to a trader?
Bear in mind that if my friend is hired, she might at the earliest start trading for herself about 18 months from now, so the curent state of the market is not especially important to her.
Bones' facetious comment may be the best, namely: "You're the smart one and the rest of the market are idiots."
The key questions it seems are these:
1. What percentage average return on invested capital do the best traders average making in a typical market? Since there are presumably some diseconomies of scale, assume that the trader is investing about $2 million in capital.
2. If the answer is 15% - 20%, then
a. It probably is unreasonable to think that fny traders have certain advantages, special knowledge, or skills that enable them on average to outperform these percentages significantly, and
b. Why would it make sense for fny to be willing to keep for itself as its return on firm capital only 7.5% - 10% gross, less all of the overhead expense of operating the firm?
Merry Christmas everyone!
I think it would be very hard to get audited financials for a private firm like this. Hopefully my friend would be able to contact some non-management employees to get more reliable info, although I don't know that the incomes of the various traders would be generally known even within the firm.
I was interested in lescor's comment that "those average incomes are probably going to come down a lot as volatility and volume dries up." I understand that volume is helpful in providing liquidity for traders. But what is a trader ideally seeking in terms of volatility? Is volatility without some kind of discernable pattern helpful to a trader?
Bear in mind that if my friend is hired, she might at the earliest start trading for herself about 18 months from now, so the curent state of the market is not especially important to her.
Bones' facetious comment may be the best, namely: "You're the smart one and the rest of the market are idiots."
The key questions it seems are these:
1. What percentage average return on invested capital do the best traders average making in a typical market? Since there are presumably some diseconomies of scale, assume that the trader is investing about $2 million in capital.
2. If the answer is 15% - 20%, then
a. It probably is unreasonable to think that fny traders have certain advantages, special knowledge, or skills that enable them on average to outperform these percentages significantly, and
b. Why would it make sense for fny to be willing to keep for itself as its return on firm capital only 7.5% - 10% gross, less all of the overhead expense of operating the firm?
Merry Christmas everyone!
Volatility- You can make money trading in a low volatility environment, but you have to risk more to make less. No matter what strategy you are employing, you can't profit unless prices move (excluding options writing). All I'm saying is that we're coming off many years of a good trading environment, and my own opinion is that we are headed to a period where a daily 5 point range in the s&p 500 will be the norm. Trading will be left more and more to only the very best pros fighting amongst themselves for a smaller piece of the pie.
If your friend really wants to be a trader, she should take the opportunity she's been offered, it sounds like a good deal. If she's just looking for a job that's going to net her a few hundred grand a year she better realize that as a trader, she will have to truly be the cream of the crop, way way above average.
Return on capital is irrelevant for proprietary traders since they don't put up any capital and aren't given a lump sum to trade. They just trade knowing that whatever capital they need is available to them. The firm in turn is using leverage extended to it by it's clearing house. Most of them also make money on a trader's commissions in addition to a cut of profits.
If your friend really wants to be a trader, she should take the opportunity she's been offered, it sounds like a good deal. If she's just looking for a job that's going to net her a few hundred grand a year she better realize that as a trader, she will have to truly be the cream of the crop, way way above average.
Return on capital is irrelevant for proprietary traders since they don't put up any capital and aren't given a lump sum to trade. They just trade knowing that whatever capital they need is available to them. The firm in turn is using leverage extended to it by it's clearing house. Most of them also make money on a trader's commissions in addition to a cut of profits.
My view of our capitalistic system is that capital tends to flow into those areas seeming to offer the best returns in relationship to perceived risks of various possible investments.
Proprietary trading firms presumably are no exception. If the owners do not anticipate receiving a return commensurate with the risk that they are taking with their equity capital invested in the business, then they presumably will liquidate the business and reinvest their capital elsewhere.
The business of training and financing traders would seem to be riskier than most, even given the presumably close monitoring of their performances and portfolios, so I would think that the owners would require an anticipated average annual return of at least 12% on the owners' invested capital (i.e., equity in the business) in order to justify continued operation of the business.
Accordingly, in the fny business model, it seems that the traders would need on average to generate a leveraged return of substantially more than 24% on the firm capital allocated to them, since the firm absorbs all overhead and splits trading profits 50-50 with the traders.
How much leverage does the clearing house typically extend to the firm, which the firm in effect turns around and extends to its traders? For intra-day trades (that are closed out during the trading day), does the clearing firm charge interest on the corresponding intra-day "loans".
Proprietary trading firms presumably are no exception. If the owners do not anticipate receiving a return commensurate with the risk that they are taking with their equity capital invested in the business, then they presumably will liquidate the business and reinvest their capital elsewhere.
The business of training and financing traders would seem to be riskier than most, even given the presumably close monitoring of their performances and portfolios, so I would think that the owners would require an anticipated average annual return of at least 12% on the owners' invested capital (i.e., equity in the business) in order to justify continued operation of the business.
Accordingly, in the fny business model, it seems that the traders would need on average to generate a leveraged return of substantially more than 24% on the firm capital allocated to them, since the firm absorbs all overhead and splits trading profits 50-50 with the traders.
How much leverage does the clearing house typically extend to the firm, which the firm in effect turns around and extends to its traders? For intra-day trades (that are closed out during the trading day), does the clearing firm charge interest on the corresponding intra-day "loans".
You must remember that this kind of prop firm has two income streams coming in: the 50/50 split on a trader's profits and the commissions they charge their traders. Our small office alone has an average daily volume of 3 million shares/day and we are being charged a penny a share in commissions. Our firm has more than 30 offices around the country and you can do the math as to why this type of arrangement is extremely lucrative for the firm. Of course, they keep a close eye on each trader's positions to minimize the chances of a trader blowing up. And I can assure you these firms have great risk management systems in place.
PS - We also have a 50/50 profit split arrangement with our local office and there are quite a number of traders in our office making six figures/ year even after the profit split.
PS - We also have a 50/50 profit split arrangement with our local office and there are quite a number of traders in our office making six figures/ year even after the profit split.
What is the name of your firm?
Does it require the trader to invest his/her own capital?
If it has a training program, how long does it last and do they pay trainees while being trained?
Do you know how much leverage it employs?
What restrictions do they place on trader positions "to minimize the chances of a trader blowing up"?
Does it require the trader to invest his/her own capital?
If it has a training program, how long does it last and do they pay trainees while being trained?
Do you know how much leverage it employs?
What restrictions do they place on trader positions "to minimize the chances of a trader blowing up"?