My Experience at a Prop Firm

[CutsThrough]

I actually agree with the OP's general point about daytrading firms taking advantage of young college grads - pumping thier heads with the get rich quick mantra.

But, the fact is that manual labor (traders hitting keys) is the key input of thier business model. What's unfortunate is that they are not honest about this. I would like to see just one daytrading firm say that, yes, they make money from commission and that they view that as justifiable as they are giving a trader leverage and access to the market thereby drastically increases thier chances of making money - if they have a head for trading.

What often happens instead, however, is that the firm pitches itself as a place of independence and an opportunity that puts one's destiny on auto-pilot. Nothing could be further from the truth. The cognitive dissonance kicks in when the new trader, who thought he was going to get rich quick, comes in everyday and is panicking about being able to pay his rent or buy lunch that day while he's in thousands of shares of stock.

So, we really have two issues here:

1. Daytrading firms disguising thier busines model and preying on those who are not operating with full information (and are inexperienced in the ways of the world). I mean, what kind of business model bases its longevity on the inferiority (stupidity) of its key input?

2. There is a sample selection effect whereby daytrading firms draw in fish. These are guys who seek out failure, who place big bets and don't leave until they've given it all away. Last I checked, gambling was illegal in most states in order to stop people from hurting themselves in this way.

I'm not here to make a normative assessment about how daytrading firms prey on fish. I'm simply saying that it's co-creative. And the OP should first look at himself and the personality traits that made him fail. A fish is a fish. Yes, it's sad that daytrading firms are there to help you fail quicker, but walking in the door in the first place is one's own fault. And believe me, I'm speaking from experience.

 

[Don Bright]

Quote from Maverick74:

Look guys, you are seeing everything as black and white when in reality there is a lot of gray out there. For example, at Worldco, we had guys that did not put up any capital. And we had guys that put up 5k to 15k. Generally we gave all the Ivy League guys a free pass. So was Worldco a real prop firm or half of one, or what? See what I'm saying? It's not so easy to define these firms. What about this scenario.

What about the firm where you put up nothing but they make you retain 20k or 30k of your money in the account as you made it to protect against drawdowns? We also did this at Worldco. We made ALL traders keep 35k in their accounts at all times. We just kept a portion of their paychecks until they were fully capped. How is that different from putting the 35k up front? It's your money either way.

What about the firm that helps you raise money from outside investors, i.e. fund incubation? They are not providing you any capital but neither are you. So????

What about the deal where you put up money and the firm matches that on the downside, i.e you go through your 15k then the firm allows you to go 15k into their money?

See there is a lot of gray out there. You guys want to simplify everything too much. And another thing, you guys act like it's so easy to go and find a fully backed prop deal. I can tell you right now, there are few out there. I talk to everyone in Chicago. I have 500 resumes on my desk from traders at Spike, Kingstree, Jump, Rosenthal, Breakwater, Allston, SMW, etc. These shops are ghost towns. Very few guys still around. Most of them trading outdated strategies, no mentorship, and even if they didn't put up capital, few of them are taking home checks after they pay their 5k a month desk fees and sky high commisions. So what's the point?

It doesn't change the fact that very few people make money at this. No amount of whining will change that.

Some good points, Mav...I was going through the records yesterday, and these stats may give an idea of the whole idea of trading as a career, it can, and is being done. A lot of people ask for some statistics, here are some that I can share.

(Assume between 400-500 traders currently. Wide margin due to those in the queue, taking exams, etc.).

38% have been with us for 5 years or longer, 26% from 2000 or earlier. This should show that this can be, and is, a long term career. 56% more than 2 years (normal learning curve). 44% from 2005 through May 1 of 2007. (obviously the 26% is included in the 38%, etc. don't think I added up to higher than 100%, LOL)

From 1995 to date, approximately 20% of all who started are currently trading. This is a bit top heavy, due to recent starts, but then again, offset by newer training methods (mentoring groups seem to really be helping, and the whole program has been updated considerably).

As my brother puts it.."the overall success rate of all people, in virtually any profession, or education, has always been around 20%" - I guess he means that 80% of people will likely be in the lower 80% of earnings and higher paid professions (Doctor, lawyer, successful entrepreneurs, etc.).


Don

 

[Joab]

Quote from Don Bright:

have been with us

Don,

No offense you know I respect you BUT what the heck does "have been with us mean"... lol.

We both know that theres no way in the world that 38% of your traders are consistently profitable!

 

[Maverick74]

Quote from Joab:

Don,

No offense you know I respect you BUT what the heck does "have been with us mean"... lol.

We both know that theres no way in the world that 38% of your traders are consistently profitable!

Why not?

Don asked me yesterday for numbers from my firm what they were and I told him in private that around 50% of our traders are profitable on a consistent basis. I also added the asterisk that most traders that come to our firm are already successful so the number is a little misleading in our case. I think the number would be lower if we brought in total newbies and trained them from scratch. So don's success rate given that a majority of his traders (I think) are newbies, his success rate is commendable. I guess the question you should be following up with is not "what does have been with us mean" but rather just how successful are they.

 

[EPrado]

Quote from Maverick74:

Look guys, you are seeing everything as black and white when in reality there is a lot of gray out there. For example, at Worldco, we had guys that did not put up any capital. And we had guys that put up 5k to 15k. Generally we gave all the Ivy League guys a free pass. So was Worldco a real prop firm or half of one, or what? See what I'm saying? It's not so easy to define these firms. What about this scenario.

What about the firm where you put up nothing but they make you retain 20k or 30k of your money in the account as you made it to protect against drawdowns? We also did this at Worldco. We made ALL traders keep 35k in their accounts at all times. We just kept a portion of their paychecks until they were fully capped. How is that different from putting the 35k up front? It's your money either way.

What about the firm that helps you raise money from outside investors, i.e. fund incubation? They are not providing you any capital but neither are you. So????

What about the deal where you put up money and the firm matches that on the downside, i.e you go through your 15k then the firm allows you to go 15k into their money?

See there is a lot of gray out there. You guys want to simplify everything too much. And another thing, you guys act like it's so easy to go and find a fully backed prop deal. I can tell you right now, there are few out there. I talk to everyone in Chicago. I have 500 resumes on my desk from traders at Spike, Kingstree, Jump, Rosenthal, Breakwater, Allston, SMW, etc. These shops are ghost towns. Very few guys still around. Most of them trading outdated strategies, no mentorship, and even if they didn't put up capital, few of them are taking home checks after they pay their 5k a month desk fees and sky high commisions. So what's the point?

It doesn't change the fact that very few people make money at this. No amount of whining will change that.

Prop trading is slowly dying. I wish that wasnt the case, but lets face the facts it is. I started in the prop biz back in 1992. When I look back I now realize how much easier/better trading was over the years. A lot of the edges are all gone. I am not on the equity side anymore, but friends of mine who still are are on their last legs. This whole hybrid system is basically the final nail in their coffins as the slippage is insane. Between it being harder to make money (look at the Vix) and how most of the prop firms are set up, its getting to be very hard to justify staying at these places. While some of them seem very "friendly", their main interest is making sure THEIR business is profitable. Thats the bottom line. Thats the reason for the desk fees, higher commissions, low tolerance for risk...etc.

The problem with most of them are like Maverick said, their strategies are outdated. I traded for a big prop firm in Chicago who's "edge" claimed to be they could get the econ numbers a few seconds before the rest of the world. They had a guy on the squakbox who yelled the #'s out. There was a 3 month period where the unemployment #'s were so far out of line that you had 2-4 handle moves in the bonds and all ya had to do was jump on the bandwagon. The only skill was who could click the bid/offer faster. The problem was the other 19 trading days of the month most of the trading room lost money. The firm never had a real trading strategy outside of their gambling once a month. The firm later imploded. I am sure you guys can figure out who it was.

Hey, I wish things were different...but they aren't. 90 % of my friends who started with me/ who I met along the way are out of the business. While some blew up, weren't exactly good traders, a good part of them were.....but between the volatility drying up, changes in way trades are executed (Hybrid....decimalization of stocks, tons and tons of computers/algorithims killing volatility), and costs that the prop firms put on the traders, the game has gotten very very hard to make it.

As far as me...yeah...am still trading....but if I knew back in the early 90's what I know now, I would be retired by now.

 

[Don Bright]

Quote from Joab:

Don,

No offense you know I respect you BUT what the heck does "have been with us mean"... lol.

We both know that theres no way in the world that 38% of your traders are consistently profitable!

OK, then I guess they all inherited tons of money and simply enjoy losing for the last 7-12 years or so, LOL. I was asked a question, I answered with facts, that’s all. A “washout” rate does not equate to long term traders. Those that make it, will likely continue to make $$ - or they couldn’t/wouldn’t still be doing this…this takes too much work to continue without profits.

And, by “have been with us” – we simply get to know our traders pretty well, understand their trading nuances, know how much money they have made, that type of thing. Brand new people are obviously under a bit more scrutiny, for their sake and ours.

I think Mav's figures support the stats. FWIW, we have added more traders this year already than we did the entire year of 2006. This is, of course, due in part to some "competitors" choosing alternative business models, or leaving the industry altogether, but the general interest in trading at this level seems to be growing.

(edit) To Mr. Eprado. I agree that we have had to do a considerable amount of adapting to the markets, and we have the ongoing challenge of keeping our traders up to speed with the latest techniques and automation, but overall, trading is still relatively "simple" (not "easy" however). I had an entire group in New York fly in Rob from PairCo to administer an 80 hour intense week of training in their office...results are already showing improvement.

I do have to agree that knowing what we know now in 1992 would be a great edge. ("edge" in knowing the econ numbers ahead of time, LOL - that is pretty funny).

All the best,

Don

 

[EPrado]

Hey Don,

The same foundation of being a good trader hasnt changed over the years. Obviosuly money management, patience, being prepared each day, and not getting emotional (personal battle vs mkt) are still needed.

Personally, I thought that the SEC/NASD absolutely killed equity trading when they went to pennies. I still to this day don't know why they went that route. The explanation I heard was that foreign investors didnt understand 1/8 th's or fractions. I hope that wasnt the real reason. I guess I shouldnt have said that equity trading is on its way out. It's just that it has changed a ton...and not for the good.

I am on the futures side now. But some of my friends are still on the equity side. Are your guys having slippage problems with this new hybrid system? I have heard its a nightmare. Also I have heard that the liquidity charges (hitting bids, lifting offers) are preventing guys from doing a ton of trades.


You have been around longer than me. Don't you miss the days of trading in BAY,DEC,USS,TMX,TBR? Man..those were some fun times.

As far as the "edge" at my old firm.....yes ..it was a joke. I realized that after a few weeks. I guess it's a good thing that the company blew up.

 

[Don Bright]

Quote from EPrado:

Hey Don,

The same foundation of being a good trader hasnt changed over the years. Obviosuly money management, patience, being prepared each day, and not getting emotional (personal battle vs mkt) are still needed.

Personally, I thought that the SEC/NASD absolutely killed equity trading when they went to pennies. I still to this day don't know why they went that route. The explanation I heard was that foreign investors didnt understand 1/8 th's or fractions. I hope that wasnt the real reason. I guess I shouldnt have said that equity trading is on its way out. It's just that it has changed a ton...and not for the good.

I am on the futures side now. But some of my friends are still on the equity side. Are your guys having slippage problems with this new hybrid system? I have heard its a nightmare. Also I have heard that the liquidity charges (hitting bids, lifting offers) are preventing guys from doing a ton of trades.


You have been around longer than me. Don't you miss the days of trading in BAY,DEC,USS,TMX,TBR? Man..those were some fun times.

As far as the "edge" at my old firm.....yes ..it was a joke. I realized that after a few weeks. I guess it's a good thing that the company blew up.

Pennies and hybrid had to be adjusted for. But remember, stocks still move the same amount (overal VIX has changed, but that relates more to the general market), you can cut losses more quickly, and we are getting tons of "sweeps" each day which is something I never anticipated.

And, yes, the "good old days" - when our true edge was being able to calculate option spread prices in our heads using fractions more quickly than the other guys in the pit(I always knew that second grade education would come in handy, LOL).

We did the Futures back in the early 80's, both on and off the CME floor...good then, across the street hedging, etc. ...tougher trading these days, IMO, than equities. Since we use a lot of quant type data for entries and exits (pairs and mergers), we don't miss the scalping days too much.

But, I firmly believe that a good trader can make money in virtually any instrument.

Don

 

[EPrado]

You really feel that stocks still move the same? I remember back in the day when the dow was down 120 or so you had stocks down multiple points across the board. Now when I see the mkt down big (you know..once every few mos ) you see stocks down a point or so at most. Stocks like Dell, MSFT,INTC would move a few points back then..now you see the mky gettting killed and they are down like .40 each. That could be all the bots doing their scalping I guess which is keeping them from moving.

 

[Don Bright]

Quote from EPrado:

You really feel that stocks still move the same? I remember back in the day when the dow was down 120 or so you had stocks down multiple points across the board. Now when I see the mkt down big (you know..once every few mos ) you see stocks down a point or so at most. Stocks like Dell, MSFT,INTC would move a few points back then..now you see the mky gettting killed and they are down like .40 each. That could be all the bots doing their scalping I guess which is keeping them from moving.

Never really traded Naz stocks "back in the day" - sticking with NYSE listed (back then, primarily due to the execution methodology that was favoring the MM's way toooo much). But if you check historical volatilty numbers for individual stocks, you'll find that they move about the same (30 vol is pretty average).

We use what we call "Bright Bands" for intraday movement action in individual stocks and pairs, this helps us determine turning points etc., which helps our guys as well. Can't give details, but basically a std deviation based on volatility vs. Bollinger's method.

We prefer "predictability" to "volatility" for the most part anyway. This has avoided a lot of heartache over the years.

Don