Prop Trading Business Model

[wmwmw]

It doesn't seem hard to see that funding companies are not in the business of funding traders. They are in the business of making money from poor traders, dreamers, gamblers, lottery players, etc.

Why? It is just how casinos and insurance companies operates. The odds are just so not good for these traders, it is just so easier to make money from them, than chasing an hypothetical great trader (who doesn't know herself how great she is..).

Is it wrong? No, it is just business, except if they break their own rules.
Robert provided a very good explanation of what are legitimate prop. Firms.

A good trader could easily trade micro futures contracts or even just one tiny ETF or stock, with her own rules and risk management, and then compound slowly and progressively until the desired trading size.

Good trades!

No people can consistently make money from casinos. And if there is one, casinos will decline him .
But funding companies will not decline a good trader.They can simply change from playing against him to following him.
Yes, most traders who trade challenges lost money.
But there are still a few good traders who can pass challenges and get funded.These are winners. According to FTMO, 8% traders who took challenges got funded.For Myforexfunds,the number will be higher, because it's maximum drawdown is 12% vs FTMO 10%;profit target is 8% vs FTMO 10%.
Besides, it allow unlimited free retakes if you do not reach profit target but have positive balance at the end of challenge and do not break their rules.
It may be tough for a good trader to pass challenge in one trial ,but it is not tough at all to maintain a positive balance at the end of a challenge.So you will have unlimited chances for one fee as long as you can have positive balance at the end of each challenge. Their terms are much better than companies like topsteptrader and are now not tough for a good trader.

Three important improvements at FTMO over peers of topsteptrader:
1. Fees are much lower;
2. Fixed drawdown vs trailing drawdown;
3. Free retake if you maintain positive balance at the end of challenge and do not break rules.


FTMO beat peers of topsteptrader by high margin, and now Myforexfunds beat FTMO in all respects.

 

[qlai]

While I could utilize the same leverage on my own - they would offer me to use the same leverage overnight.

You can get the same leverage on your own, but would you be bold enough to utilize it? IMHO, one of the benefits of prop is that it’s not your money on the line. It’s like buying an option - limited downside with unlimited upside.

 

[Laissez Faire]

You can get the same leverage on your own, but would you be bold enough to utilize it? IMHO, one of the benefits of prop is that it’s not your money on the line. It’s like buying an option - limited downside with unlimited upside.

I'm already utilizing the same leverage they would offer on my own, yes, but I can't (and usually don't need to anyway) hold overnight.

With this firm - you have to deposit your own first loss capital, so it doesn't seem to make sense to me unless:

1. The lower commissions/fees make it worthwhile
2. You want to hold overnight
3. Future prospect of trading more money for the firm if you have a good performance, i.e., they let you pull out your initial deposit and let you continue trading a larger account for them.

 

[daytrader_Canada]

T3 Capital. Contact them if you're interested. They seem serious.

For equity trading it might be worthwhile, but as mentioned in my prior post I don't see the great value for a futures trader.

Ahh T3 very well aware of them. Then its fine they won't be able to give me better terms than I already have with my current prop

 

[Laissez Faire]

Ahh T3 very well aware of them. Then its fine they won't be able to give me better terms than I already have with my current prop

Feel free to share details about your current firm if it's not a secret. You can keep their name off the boards if you want to.

Just curious how it all works. Are you trading equities or futures?

 

[RedSun]

Most of the large cap stocks are fairly stable during the day. Most time one directional. So high leverage is fine. But overnight can be challenging, particularly for the folks who play earning games.

Futures markets are totally different stories. Look at CL, NG etc. CL can have an intra-day $5 change and it is not one directional.

I think if prop traders are required to inject own capital, like 20% of so, then that would be much easier to get funded. That would also reduce the agency impact.

 

[daytrader_Canada]

Feel free to share details about your current firm if it's not a secret. You can keep their name off the boards if you want to.

Just curious how it all works. Are you trading equities or futures?

yeah sure. I trade with Alkaline Capital currently based out of Canada as I got decent terms and a great platform. Get 30x leverage with 85% split. they have a tiered commission structure but I get $0.003/share (since I trade close to million shares a month) and with ECN rebates it really comes down to approx 0.0015/share which is good enuf for me. I only do cash equities

 

[jnbadger]

I remember some guy who is a former NYMEX floor trader. He let some of his associates to trade his own capital and take a cut. He runs a hedge fund on the side. His accountants would review the prop trading reports and watch the performance. But it is not a formal prop setup. I believe he set up some rules and if any of his traders violate any rules or have poor performance, he can end the arrangement. So it is an informal arrangement.

I believe that had worked well since he can't trade his own money; he knows of those traders; he gets the diversification from multiple traders to minimize his risk. The traders get access to his capital and keeps probably 50/50 from the profit.

I went with this for awhile many years ago because I was desperate and just wanted to trade. Bad idea. I got a track record together, got my 57, and started making money. My firm takes 5%.

 

[traderjo]

RedSun - A Prop firm is a trading operation that can be either regulated or unregulated. An unregulated prop firm uses partner's capital to make money by trading. They can hire employees to trade, but they are employees. They can't take trader money as first loss and mark up anything for profit. They make their money when the trader makes money trading. The regulated prop firms come in general in two types and are SEC regulated Broker Dealer and require a SRO to monitor their business like an exchange or FINRA. They are the traditional prop firm and JBO. An example of the traditional prop firm would be SIG (Susquehanna Financial Group). They make their money when the trader makes money trading. They traders are employees and do not offer capital. The other type is the Joint Back Office (JBO) structed Prop Firm. This is the type where the trader puts up money as first loss, the firm provides leverage, the trader is some type of partner and get paid with a K1. This model allows the firm to markup commissions, interest, platform fees etc. They can make their money from education, commissions, interest, desk fees, and their cut of profits, which is generally very low and not a profit center. These firm require you to lock up your deposit for 1 year and follow their rules, if your capital is commingled with firm capital, which is the most common set up. I hope this helps. Feel free to contact me directly for any follow up questions.

Robert great explanation.. as an industry professional could you please clarify few more things on regulations
1) Which model in USA is required to be regulated as broker dealer and is it dependent on model or product ( equity futures, OTC )
2) Same question about Canada

3) In the Test for fee model the entity taking the fee is generally separate than the entity which funds! both don;t seems to be regulated !

 

[deaddog]

yeah sure. I trade with Alkaline Capital currently based out of Canada as I got decent terms and a great platform. Get 30x leverage with 85% split. they have a tiered commission structure but I get $0.003/share (since I trade close to million shares a month) and with ECN rebates it really comes down to approx 0.0015/share which is good enuf for me. I only do cash equities

At that rate the commish works out to $1500 per month.