Prop Firms - Partner or Provider?

[Canuck709]

After doing a fair amount of research throughout this forum I have come to the conclusion that most prop firms are trying to walk the line between a business partner and a service provider except by trying to do both they appear to miss on both accounts:

Business Partner

If this was a true partnership then there would be a sharing of both risk (loss) and reward. The only way to ensure long term success of BOTH parties is for both firms to have skin in the game. Having an individual absorb all of the loss while splitting any gains is not a balanced relationship. Risk return profiles are skewed for sure


Service Provider

If you opened a small business and the bank was your capital provider would they ask for a cut of your profits? No, instead they would charge you interest for using your credit facilities (BP) and a fee for transactions on the account (commissions)

I understand that this is a business and prop firms need to make a profit but it appears all of the opportunity's fail to create a balanced risk/reward profile for both parties.

As a result why not just self fund using a low cost platform with good execution?

Perhaps I have misunderstood. I welcome your thoughts and comments.

 

[Robert Weinstein]

Quote from Canuck709:

After doing a fair amount of research throughout this forum I have come to the conclusion that most prop firms are trying to walk the line between a business partner and a service provider except by trying to do both they appear to miss on both accounts:

Business Partner

If this was a true partnership then there would be a sharing of both risk (loss) and reward. The only way to ensure long term success of BOTH parties is for both firms to have skin in the game. Having an individual absorb all of the loss while splitting any gains is not a balanced relationship. Risk return profiles are skewed for sure


Service Provider

If you opened a small business and the bank was your capital provider would they ask for a cut of your profits? No, instead they would charge you interest for using your credit facilities (BP) and a fee for transactions on the account (commissions)

I understand that this is a business and prop firms need to make a profit but it appears all of the opportunity's fail to create a balanced risk/reward profile for both parties.

As a result why not just self fund using a low cost platform with good execution?

Perhaps I have misunderstood. I welcome your thoughts and comments.

I think you make some interesting points. I think you miss though when you say the "only way" is for both to share.

On its face its sounds wrong and when you dive deeper it becomes increasingly obvious that there is more than one way to catch a mouse.

If you look at a split to the 'house' for your gains and only the gains you could look at it like a business expense. If you edge in trading can overcome the market, and your expenses (including a variable split cost per month, commissions, data, computers etc.... ) then your good to go.

But to say if there is XYZ variable expense every month that is perhaps 5% of your gains you will fail misses the mark I feel.

full disc. I am a retail trader with with no split

 

[Don Bright]

Quote from Canuck709:

After doing a fair amount of research throughout this forum I have come to the conclusion that most prop firms are trying to walk the line between a business partner and a service provider except by trying to do both they appear to miss on both accounts:

Business Partner

If this was a true partnership then there would be a sharing of both risk (loss) and reward. The only way to ensure long term success of BOTH parties is for both firms to have skin in the game. Having an individual absorb all of the loss while splitting any gains is not a balanced relationship. Risk return profiles are skewed for sure


Service Provider

If you opened a small business and the bank was your capital provider would they ask for a cut of your profits? No, instead they would charge you interest for using your credit facilities (BP) and a fee for transactions on the account (commissions)

I understand that this is a business and prop firms need to make a profit but it appears all of the opportunity's fail to create a balanced risk/reward profile for both parties.

As a result why not just self fund using a low cost platform with good execution?

Perhaps I have misunderstood. I welcome your thoughts and comments.

We act as a facilitator to allow you to access markets properly and directly. No such thing as "Direct Access Broker" in reality because retail traders have to have proper funds checked on every trade they place. And, cannot do many things that prop traders can (again, like placing a $million worth of opening only orders to make a couple of grand on the opening).

And, yes, we are partners to the degree that if you happen to have a blow up, and lose your money plus our money, you are not responsible for our part, we are. This has happened in the past, we do our best to monitor risk, both for the trader, and for the Firm.

We have done both practices over the years, and, as you say, "if they don't have their own skin in the game" they don't seem to work as hard. Our success rate for those putting up capital is much higher than for those we have backed over the decades.

And, to reiterate one of my points. If you already have a $million or two, but want to venture into trading, why not keep $980,000 "safe" in the bank, and use our money, while still keeping your own P*L....just like if you traded retail as you point out.

Retail you keep P&L.

With us: you keep P&L

Retail: Many restricitons and limits. No use of capital.

With us: Fewer restrictions, use of capital.

Tax benefits...more for U.S. but some for Canadians too.

Anyway, up to you obviously.

Don