The Perfect Prop Firm

[syswizard]

Quote from Rationalize:


Not such a fun ride for academic types, or fragile egos.

Absolutely...been there, seen that.
However, the other side is now quite the reverse with algo and high speed trading. Only academics need apply to that trading camp...and egos only matter with regards to your math and coding skills. You don't have to be smart at all to prop trade, but you better have honed trading instincts and intuition, otherwise you'll bust easily.
Prop vs. Algo: Profits are tiny, but consistent....that's the big difference. Traditional prop trading can bring huge profits...at a cost of course....your marriage, your sanity.....

 

[oldtime]

Quote from Rationalize:

Hate to say it, but here's another reason why some should stay away from prop firms.

Gotta have a real thick skin, and learn to enjoy the two way derogatory banter..

Same bs & similar characters on any floor anywhere in the world.

Not such a fun ride for academic types, or fragile egos.

I will agree with you there, especially the part about not a place for deep thinkers.

A good place fpr salesmen though. If you can talk, the product sells itself. Who wouldn't want to make 1000%?

otherwise, I guess I'll go back and be alone with all the other independent traders who can endure the loneliness and have the courage and skill to make it on their own.

But if I ever need a support group, I'll make a deposit, open an account and join a prop firm.

 

[Rationalize]

Quote from syswizard:

Absolutely...been there, seen that.
However, the other side is now quite the reverse with algo and high speed trading. Only academics need apply to that trading camp...and egos only matter with regards to your math and coding skills. You don't have to be smart at all to prop trade, but you better have honed trading instincts and intuition, otherwise you'll bust easily.
Prop vs. Algo: Profits are tiny, but consistent....that's the big difference. Traditional prop trading can bring huge profits...at a cost of course....your marriage, your sanity.....

Amusingly, many algo guys fail the personal compensation trade. Got the brains to build it, but not the tenacity to attribute the upside P&L to themselves. Fail the internal sale, and suddenly, you're a cost.

Taller louder and wittier wins the day -- not necessarily smarter, wherever you sit.

 

[oldtime]

Quote from Rationalize:

Amusingly, many algo guys fail the personal compensation trade. Got the brains to build it, but not the tenacity to attribute the upside P&L to themselves. Fail the internal sale, and suddenly, you're a cost.

Taller louder and wittier wins the day -- not necessarily smarter, wherever you sit.

I worked in the computer industry before PC's when an IBM 360 was as big as your bedroom. And the San Francisco Chronicle did a piece about how all programmers were nerds, didn't know how to dress and were withdrawn. But in reality, it was just like a high school cafeteria. One guy thought he should be in charge because he was the best programmer. One guy was in charge because he could deal with employees and management. Many just wanted a good job, and there was the class clown (guess who that was.)

I don't care if you are prop trading or building a bridge or trying to win the World Series you can't stereotype the whole group, because it is always made up of individuals who either fight for their place or just find it and fit in.

 

[Rationalize]

Quote from oldtime:

..
I don't care if you are prop trading or building a bridge or trying to win the World Series you can't stereotype the whole group, because it is always made up of individuals who either fight for their place or just find it and fit in.

Agreed, but would add that it's useful to know the odds, as well as the skills that help when working for a prop firm, or a bank.

There seems to be a perception "here" that the best algorithm / strategy wins. There's a lot more to it than that. A trading desk can bring out the best and worst in people, and more so than probably any other working environment. The result is that people skills matter there probably more than anywhere else. If you're bright, but not a fighter and a salesman, it's going to be entirely unpleasant. Yes, in algos too if you want to get paid.

 

[oldtime]

Quote from Rationalize:

Agreed, but would add that it's useful to know the odds, as well as the skills that help when working for a prop firm, or a bank.

There seems to be a perception "here" that the best algorithm / strategy wins. There's a lot more to it than that. A trading desk can bring out the best and worst in people, and more so than probably any other working environment. The result is that people skills matter there probably more than anywhere else. If you're bright, but not a fighter and a salesman, it's going to be entirely unpleasant. Yes, in algos too if you want to get paid.

yes, Daniel Negraneu not sure of the spelling but you probably know he is a good poker player, when asked what the most important quality a good player needs replied, "People skills, knowing how to read people."

I'm definately not a salesman. I may be able to get away with it a few times, but I cannot consistently sell you on the fact that I hit 3 of a kind when I am sitting on crap.

 

[oldtime]

Quote from oldtime:

yes, Daniel Negraneu not sure of the spelling but you probably know he is a good poker player, when asked what the most important quality a good player needs replied, "People skills, knowing how to read people."

I'm definately not a salesman. I may be able to get away with it a few times, but I cannot consistently sell you on the fact that I hit 3 of a kind when I am sitting on crap.

but when I'm sitting on the nuts, I am really good at selling the fact that I am a loser

 

[caementarius]

To explore what would make the ideal prop firm, I think it's useful to look at what the sources of friction in the market are:

* capital: some have it and can't use it, some don't have it and could use it

Let's ignore those who don't have it and couldn't effectively use it if they did. They need to figure out how to use it before doing anything else.

So, from a very simplistic view, the ideal prop firm is going to be the best at a few things:

1) identifying those who can use capital
2) maximizing risk-adjusted returns for partners/capital providers
3) maximizing risk-adjusted returns for capital users (traders)

#1 seems hard. Do you try to grow your own or look for diamonds in the rough who somehow toughed it out to make it on their own? You look at past performance - how much data is enough to judge? When do you decide they can't use capital anymore?

#2 This is an interesting problem but I think there are a few things a firm can optimize. If a firm has 50 traders, ideally you'd have diversity among timeframes (even time of day?), uncorrelated asset classes (don't they all seem correlated these days?), and different (but still good!) strategies/execution. A good trader may only be in the market 5% of the time, and it's worth considering how best that cash could be in use effectively the rest of the time. Not that you can precisely schedule this sort of thing, but you can get an idea of optimal allocation.

#3 The ideal firm has to consider this. At some point the best traders will just trade for themselves unless they get the best risk-adjusted returns with the firm. Perhaps this is when you make them a partner/capital provider. Theoretically, there will be a point where a trader can't use more capital and their own bank will outweigh using a provider. But, I suspect in practice that traders like to spend money and diversify over their career -not necessarily limiting consumption for the 10 years it would take for them to equal the line given them by a provider.

The balance between #2 and #3 needs to be fair.

For a small trader who should actually be using capital, there is still a large chasm between them and the promised land. They want to get there so bad that they will try to run and jump - falling to their doom.

Mav mentioned CTA route and I think this is more accessible than you might think (Series 3, fees, fingerprints, disclosure docs). But it's the same story: scrounge for small money until you have 3-5 years and at least $1M AUM - then _maybe_ things get interesting.

I think the takeaway is that there is no dream. There is only hard work for _the chance_ of a shot at the big leagues. Can you commit to grinding away for 5 years even when the end is uncertain?

 

[Maverick74]

Quote from caementarius:



#3 The ideal firm has to consider this. At some point the best traders will just trade for themselves unless they get the best risk-adjusted returns with the firm. Perhaps this is when you make them a partner/capital provider. Theoretically, there will be a point where a trader can't use more capital and their own bank will outweigh using a provider. But, I suspect in practice that traders like to spend money and diversify over their career -not necessarily limiting consumption for the 10 years it would take for them to equal the line given them by a provider.

The balance between #2 and #3 needs to be fair.

Let me address this point. These guys are clever and obviously they have thought of this. What most firms do that back traders is they only pay you out a portion of your earnings, the rest go into deferment. In other words, it has a vesting period. If you leave the firm before it's vested, you don't get it!!!

Let's use an example here. Say you get a 50/50 split. Every month, you might get 80% of that and the other 20% goes into deferment. So let's keep the math easy and say I make 60k a month. That leaves me 30k in payout. Of that 30k, 6k if it goes into long term hold which is usually 2 years, could be 3 years. Over the course of year one, I now have 72k in deferment (12 X 6). Year 2, I do exactly the same and another 72k goes into deferment. I now have 144k owed to me in deferment. If I only have a 2 year vesting period, at the end of that 2nd year I could take out the first 72k.

If I quit and leave the firm then, I give the other 72k to them! If I have a 3 year vesting period, I would leave behind 144k!!!!!! Think about it, most traders are too damn cheap to pay for premium cable channels. The idea of just giving away 72k is a lot of money regardless of how rich you think you are. Imagine if that amount is 250k or 500k. Would you really just give that money away for nothing. Some guys actually do, but most don't. The guys that don't have much capital in deferment won't be giving up much if they leave, but that usually means they weren't that successful and leaving their backer might not be the best thing for them to do.

 

[SteveNYC]

Quote from oldtime:

I've never been so offended in all of my life.

This is what I strongly dislike about stupid people

They harass others with their stupidity. Some do it proudly.

Not even stupid people like to be harassed with stupidity.

Sad fact alert: Stupid people aren't smart enough to realize that they are stupid.

Stupid people should stay with stupid people.

Hangout out with idiots and you will see what I am talking about.

Also, the flak you receive is usually proportionate to the flak you dish out.