Proprietary Trading vs. CTA

C

chinook

Hi all,

I've been running automated quantitative trading programs in the futures market for the past two years-- My background is in physics. I monitored the programs in real-time in a demo account for one year and traded live for a total of about a year. The results are in line with the calculations.

Last year, I looked into registering as a CTA. However, my funding source and potential partner couldn't raise money beyond the initial capital... I traded live for a client (of his) about 8 months. Then we stopped trading.

This year, I've been trading with my own capital in a new program (and still tracking last year's program). I started looking for funding again. One of my old contacts suggested that I should look into propriety trading firms.

The arrangement would be such that the firm will put in all of the capital. And I will trade a leveraged version of my program. Since the program is intraday and these firms are exchange members, they won't be putting up any capital for margin. They will be basically risking their money for drawdown of the portfolio.

Let's say that there won't be any software and/or infrastructure expenses. My question is under these conditions what should I expect for %profit sharing? I hear that usually these firms offer a sliding scale for profit sharing. As the total profit of the trading program goes us, so does the percentage share of the trader.

Thanks.
 
Expect about a 50% profit split for a Chicago-style prop futures business model. The scale typically goes up when you reach some high water mark in terms of P&L. Some will ask you to share your code for "security" or "risk control" purposes - my understanding is that a few do not. You will likely get paid quarterly on a W-2, which sucks in terms of tax treatment.

You will need to get your shit wired tight before you pitch any of them. You will need some metrics: average monthly returns, average monthly max drawdown, and average monthly Sharpe Ratio preferably using live data.
 
Quote from bone:

Expect about a 50% profit split for a Chicago-style prop futures business model. The scale typically goes up when you reach some high water mark in terms of P&L. Some will ask you to share your code for "security" or "risk control" purposes - my understanding is that a few do not. You will likely get paid quarterly on a W-2, which sucks in terms of tax treatment.

You will need to get your shit wired tight before you pitch any of them. You will need some metrics: average monthly returns, average monthly max drawdown, and average monthly Sharpe Ratio preferably using live data.
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bone,

Thank you very much for the feedback! 50% profit split is more than I expected! Will this still be the case if I don't bring in any risk capital.?

In terms of payments, I think firms offer different structures, W-2 being one of them. I agree that that'll suck in terms of tax treatment!
 
Quote from chinook:

Will this still be the case if I don't bring in any risk capital.?
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Generally speaking, Chicago futures prop firms won't let you bring in your own capital. In fact, the CME bylaws for electronic trading member firms specifically stipulates that the firm and not the trader/employee take the downside risk. Of course, that's why they pay out periodically and some firms even hold back part until the end of the year ...

I am speaking in gross generalities here, BTW.
 
Quote from bone:

Generally speaking, Chicago futures prop firms won't let you bring in your own capital. In fact, the CME bylaws for electronic trading member firms specifically stipulates that the firm and not the trader/employee take the downside risk. Of course, that's why they pay out periodically and some firms even hold back part until the end of the year ...

I am speaking in gross generalities here, BTW.
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bone,

Thank you very much! I wasn't aware of the CME bylaws that you mentioned...

I think most of the prop trading I've been hearing about were geared for equities and beginner traders. In these cases, the firms almost didn't risk any capital and actually made money from training, infrastructure fees and commissions.
 
CME Rule 106.R. Electronic Corporate Member Firm

6. What guidelines are used to determine if trading is proprietary?
A proprietary account is evidenced through:
• All profits and losses of the account are included in the income of the firm.
• All profits and losses of the account are taxed to the firm.
• The trader (non-owner) does not make any capital contribution to the account.
• Only the firm’s capital is at risk of loss; no traders may make any contributions or payments to the firm nor have any capital at risk.
• All trading activity must be solely for the benefit of the ECM. No other individuals or entities
can have any ownership interest in the ECM’s proprietary accounts.
• All funds contributed to and traded under the ECM are subject to loss from any and all trading activity of the ECM.
 
beware of prop firms.
my experience is this, and i've talked to over 15 prop shops:

such firms are never interested in trading profits.
they are only interested in trading volume = rebates from exchanges.

and you would have to cover all the risk involved with trading. prop gets the income regardless of your profits or losses.

they will never ever tell you that directly. you can lose your precious time talking with these b###rds.

i'd even say that props are your worst enemy, not the market.

the only way you could earn money with a prop, is to make gazillion of trades which will break even or slightly lose and then make a killing trade, like long gold from 1400 and sell at 1600.
 
Quote from DT-waw:

such firms are never interested in trading profits.
they are only interested in trading volume = rebates from exchanges.

and you would have to cover all the risk involved with trading. prop gets the income regardless of your profits or losses.
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DT, you are referring to prop equities firms - we are speaking about prop futures firms like the Chicago prop futures business model, they are completely different animals. No valid comparison.
 
Chicago?

Why not head down to the Bahamas... :cool:

www.quantres.com (I have no affiliation with them)

But... If your system is any good, why not try to come up with the money on your own? The reward is much greater...
 
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