My Experience at a Prop Firm
- Thread starter pineman
- Start date
What I don't get is why people (both traders and "management") cannot see this coming much earlier. I mean, I would have a very simple test: are you consistently profitable at home? For more than a year? Then you should be able to make it at a prop shop. If you can't make it at home, chances are that you won't make it at a prop shop either. To me this is simple to understand, almost trivial. What I'm led to believe is that, in many cases, the prop shop maangement knows that and they still encourage the person to commit their time and money and effort to an endeavor that will most likely hurt them, and that's reprehensible.
It works the other way too. For example, a few years ago I was thinking of joining one of the best prop shops (very visible on ET too.) But, after thinking about it for a while, I decided to wait until I had a year of consistent profits - not very large profits, but a positive year with more than 6 distinct months in the black.
The problem is that, when this happened (at that time I had been trading about 3 years) I couldn't see why I wanted to make that step - IB was pretty cheap (now it is cheaper), my cable connection was pretty fast and good, the training I had received at Pristine and a couple other such places was working, and I had sufficient (but not too large) capital to play the game. I was also gradually getting into trading the eminis and stock options to get more leverage, counteracting the lack of a larger trading account. Little by little, the expected benefit from "going pro" was diminishing. So, I never took the step.
That may be the crux of the matter here: in many cases, the value proposition of the prop shops is so weak when presented to established traders that these folks turn them (the prop shops) down. Therefore, the prop shops turn to weaker traders, with the devastating (to their reputation) results mentioned in some posts of this thread.
Do you guys agree with this scenario? If yes, how come some people say that prop trading is coming back big time? What am I missing here? Are these shops becoming better and able to offer so much more value than the likes of IB, or are they just exploiting a new generation of amateur traders with no experience but fresh capital to burn? Any ideas?
What you describe may be the case at many prop shops, but a shop that backs traders with their own money and has more to earn if the trader is net profitable instead of, say, just gross profitable (I.E. they keep a % of gains instead of just overrides) will likely not want to waste time and capital on someone whom they believe is unlikely to make it as a trader.
I started trading at an equity prop firm and was given a good education in the dynamics of the market. I was told some simple strategies which consistently work, and given a chance (as well as the money necessary) to explore the different opportunities the markets can offer. I not only got the chance to learn to trade without risking my own capital, but I also get to trade in a room with successful professionals who constantly share ideas with me on trades in real time. The training and the team work, both crucial to me making the most money the fastest, I would not have had without a prop firm.
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This is not to say that I don't think a lot of prop firm owners are sleazy scumbags who contribute nothing of value to the world and try to trick ambitious or hopeful college students into wasting their time and money gambling with no edge while making commission money for the firm. I do find leverage broker type 'prop' firms that advertise as though they are 'hiring' to be very sleazy - usually they're charging higher commissions or trying to make you churn. Even with a Swift-style prop model, the interests of the trader are not always aligned with the interests of management.
If you don't know how to trade and will be given training, it's worth it to go to a prop shop. What percentage of prop firms will actually teach you how to grind money out of the markets every single day? I only know of one, and I feel lucky to have found that - but I would be very skeptical of anyone who promises such training (though there are places out there that will help you become profitable).
Let me take a stab at a few of your points. The first one being that prop firms take in bad traders. This is actually not true, for the most part. Usually prop traders come from one of three molds. One, is a guy who is already trading prop at a firm but leaves that firm for another firm to get better rates or more leverage. Two, the guy right out of school who knows nothing about trading and currently has no bad habits and is therefore easy to train. And three, the guy that is trading from home but is undercapitalized and wants more leverage and perhaps an office environment, but has had some degree of trading success from home.
Very few if any prop firms will take in guys who have blown up at other places or who have had no success trading on their own. Now, here's the catch, there are sub LLC's that will more then happily take those bad traders in. The reason obviously is for the commisions over rides. Sub-LLC's and prop firm are NOT the same thing. A sub-LLC is just an LLC usually created by an existing trader at a prop firm that now wishes to bring traders under hiw own wing and do whatever they want with them. In many cases, the existing prop firm doesn't even know these guys exist!!!! That's the problem.
As far as the prop firm bringing in traders they know will fail, I have to disagree with this. Again, in the sub-LLC world, all bets are off. But no reputable prop wants a bad trader. The reason for this is that bad traders take up a lot of labor on the part of the prop firm because their risk management has to watch them like a hawk. And two when they do blow out the prop firm has to spend a considerable amount of time and money to replace that bad trader. Trust me, in a utopian prop world, the prop firm would just like to have solid size traders who are very successful making a lot of money. Keep in mind, bad traders usually have very small position limits and trade very small and don't make shit for their firm. Who the hell would want that?
As for the guy at home who is making money, why would he want to go prop? Easy, for more money. Look, the bottom line is, unless you are financially secure, trading from home with an undercapitalized account, you are not going to make a living. At some point you will become frustrated and increase your leverage and that's when you will take a large hit that will wipe you out. I'm sorry, but in the real world, it's not so easy trading with a undercapitalized account.
Also, there are many traders, like at our firm and I'm sure at Bright's as well, guys come to us because they want a crack at managing some serious money. Not leveraged money, but running a small fund. That is the goal of most traders. Guys want to get 5, 10, 20 million and start a fund. This is much easier to do through prop then trading at home in your boxer shorts and compiling a track record with a 20k account. Nobody wants to trade their own account at IB for the rest of their life, they aspire to something greater, something more. Why risk all your money in an IB account taking massive risk to make ends meat when you can trade larger sums of capital and make 15% to 20% a year taking little risk and still making 7 figures for yourself? I think it's pretty obvious.
My firm is not a sponsor on ET so I'm not going to mention the name on here or through PM. Don Bright will probably be happy to tell you. You can do a search on here and probably find the name.
Ahhh... reminds me about why I moved to Chicago from LA...
As I mentioned previously, I was LA at the time. I kept on hearing stories about Chicago and NYC (East Coast) traders banging large $$$$ at the time. Those consistant 7 digit trader stories / led me to consider myself to move into those firms to take my game in a higher arena, with the big dogs...
I move to Chicago and start networking soon after... and I find out how crazy the top traders are.
You have to be a bit insane... near-Rainman... Autistic... existing to trade... take trading out of these people and they'll end up being annoying bums... -types to bring that kinda money. Watching and meeting these types led me to becoming humble again.
Another issue is that the industry has changed. The prop. firms has changed from fully discretionary to a "trade desk"-ish trading. You were given full discretion on trades but now, most surviving firms have quants. and researchers telling you how to trade. Whether it be scalping or market making... the degree of freedom is near none...
When I first moved to Chicago, Momo-trading was going down and scalpers started being the next thing. Eurex Trading was getting introduced and along came the arbitrage. Rebate trading, options market making, and others just came and go...
The prop. traders just moved from one firm to another following the trend of what's hot at the moment. Once the trend is gone, they start looking for another like a flock of sheep.
If they're lucky enough to join the "hot" firms, they gain a few years of being able to survive. If they don't make the cut or late catching the bandwagon... you try trading on your own. Because their trading was so reliant on the models developed and due to the limited environment provided by the firms, most can't make it. They stop trading and try something else to do...
This may give some retail traders to feel superior over current prop. traders but markets change the industry. Whatever the retail traders do... they'll have less chance of surviving and adapting to changing markets...
One key character for a prop. professional trader is the ability to survive.
As for me... I saw what I saw. It gave me an insight on the industry. I'm not Autistic/crazy and I didn't want to be a sheep. The reality check has given me to quit being a prop. trader leaving the cycle of flocking from one firm to the next. Of course, my last firm's trading "edge" was getting killed.
So my decision was trade on my own. Initially, I started learning programming and develop trading models to keep up with the changing markets. My income wasn't large enough so I ended up working in restaurants as a part-time chef.
After about a year, I was able to have some of my old contacts trade my models. I started rebuilding my career as a Trading System Developer rather than a prop trader. I built my skills along with the reputation and new contacts especially in the hedge fund side of trading. It took me 3 years to quit my job as a chef... (I was really good at it too... #3 Chef in Sushi Samba Rio, Head Japanese Cuisine at Fulton's)
Well... lotta shit happened. Killed my ego (Meeting traders from old firms during my night job sucks...). Learned the business (Especially, about survival and sacrifices). Gained new skills (Programming, Quant, Development).
Now??? I run my own hedge fund so I guess I made the right decision.
TS, are you saying that you're able to come up with successful, working systems... that you then sell to the above mentioned type of trader, who can in turn make good money by trading them? Ever done that?
Mainly, I was talking to firms. Some individuals.
Most of the systems I develop were/are shitty. I've been screwed a few times by not taking precautions during business talk, like providing the source code. I think I've made more mistakes than good ones. Mistakes/fucking up are just part of my learning curve.
"Successful, working systems" - Very hard to say. I was/still part of my learning curve. My systems back then worked for a while and needed a lot of monitering and tweaking. Luckily, some systems worked out well enough to keep my name in the game. Seriously, I was lucky.
Also, my programming skills weren't sufficient enough to have the models fully automated so the prop firms ended up using it as a tool or a grey box. The traders would add discretion and provide a lot of whining feedback. This also helped out on the long run.
Discretionary trading and Systematic trading is a different animal to "an extent". I was too naive to know it back then and got cut out. I've had a trader hire me as a researcher so that we can duplicate his own trading style into a system. He sees the negative test results and I get blamed for running the test wrong or wasting his time.
Finally, I was never a Schony trader but I did meet the Chicago office's manager at the time, G.L., about trading my system. He told me they have alot of Ph.D.s doing research and I was a piece of shit.
Other than that, I was friends with a few former-Schonies where I've heard humbling stories about traders like D.R. and the Russian.