prop vs. retail brokers

P

pbanerjee

Background:

I've been working at hedge funds (HF) as quant strategist / trader for last 12 years. I don't have enough saved to start my own HF, but over the 12 years I have saved decent enough to consider the option of quitting my job and "trading for a living".

Questions:

I was evaluating working for a prop firm versus simply trading on my own at retail discount brokers like Interactive Brokers (IB), (which I already anyway do).

1. I couldn't figure out why would anyone (i) who is experienced, and (ii) NOT a day trader, want to work for prop trading shops, versus trading on IB?

(a). from the few sample of prop shops I visited (mostly small though), none pay any base salaries anyway. commissions are same as IB, or IB is lower. IB has better geographical & product coverage.

(b). overnight leverage provided by prop shops is around 7x; but if the prop shop retains 10% of earnings, then the effective leverage is 6.3x. IB anyway provides 5x leverage for a portfolio margin account. Not much difference between 5x vs. 6.3x for a non-day trader.

(c). the prop firms that I visited had not much exposure to setting up a quant trading process, i.e. no matlab/programming tools, or box-to-box execution, etc. they are mostly discretionary day-traders who basically jump on the news, click a few buttons to buy/sell, and close out by end of day. having been with buy-side HFs for a long time, this behavior didn't look something that would suite my (quant) style.

So, apart from moderately higher leverage, what are the pros of prop firms viz-a-viz IB?


2. I would happy to put up a deposit (which prop shops seem to require), but a minimal base salary can make my mind at ease for quitting my current job. Are there any prop firms that pay base salaries? Or, is no base salary always the norm?

Thanks.

p.s. (i) apologies for any inherent biases in my questions, (ii) I hold nothing against day-traders per se.
 
not many pay a base and the ones that do don't pay too well. The industry is almost entirely performance-based. That being said, Prop trading is not a secure job. If you need the salary, put up less and put more aside for living expenses. The good thing about prop is you can 10:1 or even 20:1 from many firms. You have much less capital at risk for trading a larger account. Unless you put up 100k in the account, you are limited to 4:1 leverage. For 20k, that's 80k in a retail account or 25% margin. For the same 80k purchasing power, you can have as little as 4k at risk with a prop firm. you also will have more room to mess with the API and run automated systems. A lot of prop firms also offer seating in-house which gives you access to their computer systems and fiber networks which can be helpful if you're out in the suburbs.

There are other advantages but the main one I can think of is leverage. A downside of the prop industry is the series 56 licensing with CBOE firms. others require a 7. If you have that already, it makes things easier. If you hold overnights that may also be an issue.

It comes to how much volume you do for clearing rates. You can get dirt cheap clearing with better routing options from prop. The advantages aren't as inherently evident as they were years ago when the regulatory environment was more lax and you can open a prop account easier. These days you need to weigh your factors. Many firms have a 1-year lockup which you don't have in a retail account. If access to buying power is a priority for you, prop can help.
 
Quote from pbanerjee:

Background:

I've been working at hedge funds (HF) as quant strategist / trader for last 12 years. I don't have enough saved to start my own HF, but over the 12 years I have saved decent enough to consider the option of quitting my job and "trading for a living".

Questions:

I was evaluating working for a prop firm versus simply trading on my own at retail discount brokers like Interactive Brokers (IB), (which I already anyway do).

1. I couldn't figure out why would anyone (i) who is experienced, and (ii) NOT a day trader, want to work for prop trading shops, versus trading on IB?

(a). from the few sample of prop shops I visited (mostly small though), none pay any base salaries anyway. commissions are same as IB, or IB is lower. IB has better geographical & product coverage.

(b). overnight leverage provided by prop shops is around 7x; but if the prop shop retains 10% of earnings, then the effective leverage is 6.3x. IB anyway provides 5x leverage for a portfolio margin account. Not much difference between 5x vs. 6.3x for a non-day trader.

(c). the prop firms that I visited had not much exposure to setting up a quant trading process, i.e. no matlab/programming tools, or box-to-box execution, etc. they are mostly discretionary day-traders who basically jump on the news, click a few buttons to buy/sell, and close out by end of day. having been with buy-side HFs for a long time, this behavior didn't look something that would suite my (quant) style.

So, apart from moderately higher leverage, what are the pros of prop firms viz-a-viz IB?


2. I would happy to put up a deposit (which prop shops seem to require), but a minimal base salary can make my mind at ease for quitting my current job. Are there any prop firms that pay base salaries? Or, is no base salary always the norm?

Thanks.

p.s. (i) apologies for any inherent biases in my questions, (ii) I hold nothing against day-traders per se.
More...

You are talking about bucket shops. Real prop shops pay salaries plus bonus. But in regards to comparing bucket shops to IB, I agree, IB is just as good especially with portfolio margin.
 
There are plenty of good traders at bucket shops who don't get paid a salary. If you're mainly concerned with software and rates, prop really doesn't have an advantage. In terms of leverage, it's not you that can be leveraged 6:1 it's the firm that's leveraged. So if the guy next to you never holds overnight, the firm can use his money, so potentially potentially allowing you to be leveraged more than 6:1.
 
10-1 or 15-1 leverage intraday is a must for pairs trading and really a must for making a six figure living unless you have 600k+ figure account already.

Even if you don't consider yourself a day trader now, once you start devoting full time to trading, you will probably start seeing alot of intra day setups that you will wish you had some dry powder to play.

The biggest mistake i've seen is traders trading too small (next to trading too big). If you are just trading your own money you will be wasting a lot of oportuinity if you are a good trader.

If you are a good trader you should be making close to 7 figures. At one bucket shop i took a 65k deposit to nearly 4 million in like 8 months. Could i have done that jrking off in front of my tdameriatrade account? nope. They would be calling me every 2 seconds asking if i knew about the day trader rule and such and that i had traded too many times or something. Or that i had a dumb margin call.

If you going to be a full time trader, it pays IMHO to go with a shop like Echotrade or Chimera or such.
 
Everyone who is a trader, at some point becomes a day trader from time to time too. Even if right now you think in terms of longer term swing trades. There will be times when you want to join in the action. You'll see key reversal, news or other juicy setups, and then having the 30-1 margin sitting there could just make your year. At some point if you a good trader you just got to doulbe or triple down and say this is the spot enough is enough, and that turns your entire life around. Having the extra leverage is sorta like being at the black jack table, being able to triple down on a 11, not just double down, all the while being card counting to boot.
 
Quote from Maverick74:

You are talking about bucket shops. Real prop shops pay salaries plus bonus. But in regards to comparing bucket shops to IB, I agree, IB is just as good especially with portfolio margin.
More...

I know what you meant, but it's funny, too. Can't wait for the new ad campaign:

"Interactive Brokers: Rated No. 1 Online Broker by Barrons and just as good as a bucket shop"
 
Quote from Brighton:

I know what you meant, but it's funny, too. Can't wait for the new ad campaign:

"Interactive Brokers: Rated No. 1 Online Broker by Barrons and just as good as a bucket shop"
More...

Well, to be fair, at IB you can trade about 75 different foreign markets. At a prop firm you can't. At IB your money is insured, at a prop firm it isn't. Hell IB has domestic markets you can't even trade at various prop firms like VIX futures. So IB still has some advantages. Then there is the minor stuff like customer priority on options.
 
What everyone is saying about the access to leverage is 100% correct. You cannot daytrade successfully at a retail firm. They are made for investing and swing trading. If you want to be a successful day trader you MUST trade at a prop firm. Here is why:

Let's assume you have $100k to trade with. IB will give you either 4-1 or 6-1 intra day. While that might seem like a lot it really isn't for opening/closing strategies, pair trading, and times when the market is heating up and you need that extra BP. Try calling E-Trade or IB and asking them for more BP for the day!! They will laugh at you if they can even figure out what you are talking about. I just make a call and can get extra BP in 2 minutes.

Another factor: At E-Trade and such you are sending your orders to a market maker who trade against your order. There is a reason that market making firms PAY for your order flow. It is an asset. I send my orders directly to the market and have a choice of over 100 destinations, including the same dark pools that the institutions and hedge funds use.

Furthermore: Costs. I don't trade a lot of volume on a monthly basis but if I add liquidity I can get down to $.0015/share. That is $1.50/1000!! or 15 cents for 100 shares. I can easily scale in and out of positions and not be hit with a per trade fee each trade that can be as high as $15! If you trade more volume and add liquidity for trades you can easily trade free! Ask IB if they will let you trade for free!

You call these bucket shops but you have no idea what you are talking about. I trade with a SEC registered broker dealer and was required to pass the FINRA Series 56 Proprietary Trader Exam. People that call a firm like JC Trading Group (WTS) a bucket shop are clueless.

True, I can't trade 175 different markets and instruments, but I can trade any of the approximately 4,000 stocks listed on the US exchanges. I get access to all the leverage I need so I can trade strategies that I can't trade retail, and I get incredible pricing and fills that are measured in milliseconds.

Beat that!!
 
Quote from textrader4:

What everyone is saying about the access to leverage is 100% correct. You cannot daytrade successfully at a retail firm. They are made for investing and swing trading. If you want to be a successful day trader you MUST trade at a prop firm. Here is why:

Let's assume you have $100k to trade with. IB will give you either 4-1 or 6-1 intra day. While that might seem like a lot it really isn't for opening/closing strategies, pair trading, and times when the market is heating up and you need that extra BP. Try calling E-Trade or IB and asking them for more BP for the day!! They will laugh at you if they can even figure out what you are talking about. I just make a call and can get extra BP in 2 minutes.

Another factor: At E-Trade and such you are sending your orders to a market maker who trade against your order. There is a reason that market making firms PAY for your order flow. It is an asset. I send my orders directly to the market and have a choice of over 100 destinations, including the same dark pools that the institutions and hedge funds use.

Furthermore: Costs. I don't trade a lot of volume on a monthly basis but if I add liquidity I can get down to $.0015/share. That is $1.50/1000!! or 15 cents for 100 shares. I can easily scale in and out of positions and not be hit with a per trade fee each trade that can be as high as $15! If you trade more volume and add liquidity for trades you can easily trade free! Ask IB if they will let you trade for free!

You call these bucket shops but you have no idea what you are talking about. I trade with a SEC registered broker dealer and was required to pass the FINRA Series 56 Proprietary Trader Exam. People that call a firm like JC Trading Group (WTS) a bucket shop are clueless.

True, I can't trade 175 different markets and instruments, but I can trade any of the approximately 4,000 stocks listed on the US exchanges. I get access to all the leverage I need so I can trade strategies that I can't trade retail, and I get incredible pricing and fills that are measured in milliseconds.

Beat that!!
More...

I ran a regional office of a prop firm for 8 years. I know what they are and what they are not. There are pros and cons to everything. I also traded with the largest and most notorious of them all in NY back at the peak. The markets are very different today then they were then. For "most" people, not all, but most people, they can get what they want from IB. Yes, there are still some advantages to a prop firm for some people.
 
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