Prop trading looks great, then why most retail traders don't simply join in?

[cashonly]

I would think there are two primary reasons why people don't trade prop:

1. Series 7 license - A lot of people just don't want to put in the time and effort to get this license and it's required to trade prop. You're basically stepping up to the next level of commitment in your trading career. However, if you're currently trading profitably retail, and need the capital advantage that prop offers in order to increase your bottom line, the time involved to get this is insignificant compared to the financial rewards of getting additional capital to use profitably in the market.

2. SIPC protection. In a prop firm, you don't have SIPC insurance like you do at a retail brokerage. Generally speaking this is not an issue, however, some prop firms have gone under, taking their traders money with them. You just need to find a firm that is financially stable and is not depending on it's member's money for capital. And if you're still concerned, you just need to decide if the rewards outweigh the potential risks. If you're trading retail and making $5K/month, then you switch to prop for the additional capital, putting in $15K to start, and then are making $20K/month, after one month passes, you're ahead of the came even if the firm did go under.

I'd be interested in other reasons people don't go prop if they're doing well retail and want to step it up to increase the bottom line.

Cash

 

[dac8555]

Quote from cashonly:

I'm not familiar with what you describe. I don't know of any firms that don't allow you to hold overnight.

really..i dont know any firms that DO allow overnights. but then again..I am not an expert on props.

 

[cashonly]

Quote from dac8555:

really..i dont know any firms that DO allow overnights. but then again..I am not an expert on props.

I know that we definitely do. Maybe some other firms have changed things and don't.

Based on your comments, I now have a third reason why people may not do prop. They may have incorrect information about how prop firms work.

Cash

 

[OddTrader]

Would it be possible that some traders planning to set up hedge funds may want to keep their trades in secret? Perhaps too much explosure of their trades around prop trading rooms would generate conflicts.

 

[dac8555]

Quote from OddTrader:

Can you use the leverage offered by prop firms to compensate that? Comments?

i dont know how much leverage is offered now adays...

but, If i have a 100k account, then i have 400k buying power intrdaday or 2:1 long term for stock. or 100k in options. If i want to be directional in options...i imagine i could control easily $1mm work of stock or ETF with options...not that i would want to do that.

another couple good reasons why people dont go prop would be:

1. Resume suicide
2. No base salary
3. High risk
4. would require giving up a day job where as someone can gain much more experience and market knowledge working for a brokerage house...this could be done while trading on the side. much lower risk solution.

 

[FullyArticulate]

Quote from cashonly:


Based on your comments, I now have a third reason why people may not do prop. They may have incorrect information about how prop firms work.

Perhaps a intro would be useful? Your firm's web site isn't terribly informative either.

I've heard everything from:

A) The prop trader puts up his own money and is 100% responsible for his losses, gets some additional leverage, and shares his winnings 50/50 with the firm.

B) The prop trader takes no personal risk and trades 100% with the firm's money. He gets a share of the winnings.

The former seems the same as retail trading. Some strategies obviously would benefit from additional leverage, and so something more than 4:1-ish would be helpful.

The latter seems "too good to be true".

 

[dac8555]

Quote from OddTrader:

Would it be possible that some traders planning to set up hedge funds may want to keep their trades in secret? Perhaps too much explosure of their trades around prop trading rooms would generate conflicts.

I am sure it exists..but highly unlikely.

The people that go on to hedge funds, or set them up normally are extremely well educated, extremely well conected, and have a very good resume from very prestigous firms. people like this dont work at prop firms becuse they dont need to.


As far as keeping trades a secret...i dont know ayone who really cares that much who doesnt already own or work for a fund. i dont think this would be a factor.

 

[dac8555]

Quote from cashonly:

I know that we definitely do. Maybe some other firms have changed things and don't.

Based on your comments, I now have a third reason why people may not do prop. They may have incorrect information about how prop firms work.

Cash

i couldnt think of the name before...now i remember. Swift trade. they are a big one right?? I know the office near where i work does not allow overnights.

 

[Don Bright]

Quote from dac8555:

I would never do it for a lack of overnight holds and more sophistocated strategies like options. Most of my money I make holding longer term. liquidating end of day would cut my profit at least in half if not more.

What makes you think that prop traders only day trade? Heck, our guys keep dozens of pairs, mergers, and even "swing" trades overnight...that's a big part of why it makes more sense to join a firm.

Don

 

[Don Bright]

Quote from OddTrader:

Would it be possible that some traders planning to set up hedge funds may want to keep their trades in secret? Perhaps too much explosure of their trades around prop trading rooms would generate conflicts.

We don't bother checking 500-600 traders' positions...and most are pairs or mergers...no conspiracy here. Hedge funds give away 80% of their profits, our traders keep 100% and are given enough capital to do well, without having to borrow from investors.

Just a comment,

Don