"True Proprietary Trading" Defined

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spinoza

What is "True Proprietary Trading"? Below is one perspective from another web site:


Proprietary trading comes in many forms: There is an alternative to retail trading known as "proprietary trading." This phrase was originally created when larger full service Wall Street brokerage firms and other financial institutions employed traders to trade their capital. However, don't confuse this “true” type of employee prop trading with the general proprietary trading industry, which evolved from the day trading firms of the 1990s. Most prop traders that are members of, or work in, a "proprietary trading firm" are asked to risk their own capital in front of the firm's capital. They are not employees with a job on Wall Street!

These proprietary traders types are very much like retail traders because, in reality, they are risking their own money. The big difference is that these prop traders have access to far greater leverage than retail traders who have 4 to 1 leverage or margin under the pattern day trader rules and 2 to 1 otherwise. Proprietary traders often get 10 to 1or 20 to 1 leverage because a proprietary trading firm may allocate money to traders within a firm however it likes. Broker dealer prop trading firms are limited to 6 to 1 leverage overall.
 
Quote from spinoza:

What is "True Proprietary Trading"? Below is one perspective from another web site:


Proprietary trading comes in many forms: There is an alternative to retail trading known as "proprietary trading." This phrase was originally created when larger full service Wall Street brokerage firms and other financial institutions employed traders to trade their capital. However, don't confuse this “true” type of employee prop trading with the general proprietary trading industry, which evolved from the day trading firms of the 1990s. Most prop traders that are members of, or work in, a "proprietary trading firm" are asked to risk their own capital in front of the firm's capital. They are not employees with a job on Wall Street!

These proprietary traders types are very much like retail traders because, in reality, they are risking their own money. The big difference is that these prop traders have access to far greater leverage than retail traders who have 4 to 1 leverage or margin under the pattern day trader rules and 2 to 1 otherwise. Proprietary traders often get 10 to 1or 20 to 1 leverage because a proprietary trading firm may allocate money to traders within a firm however it likes. Broker dealer prop trading firms are limited to 6 to 1 leverage overall.
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Excellent description. Got that from that accounting firm that caters to traders? Green something?
 
What is the best way to think about actual Proprietary Trading? Further interesting observations:



Although a proprietary trading firm's sales pitch may imply otherwise, these types of proprietary traders are not really trading "other people's money" but rather risking their own money to cover their own trading losses (generated in sub-accounts of the firm) and paying for their own expenses incurred within the firm (such as margin interest, training, office usage, and more). In the majority of cases, the firm does not ultimately pay for any of the traders’ losses and expenses.

This is the opposite of proprietary trading on Wall Street where the firm pays for all losses, expenses, and salaries to the trader. Proprietary trading firms do not pay salaries, and the traders lose their own money. So, using the term "proprietary trading" is deceiving.

"Entrepreneur proprietary traders" risk their own money in the same manner that a "retail business trader" does. The big difference is that entrepreneur proprietary traders have access to more leverage than retail traders do.

A better phrase would be to say a proprietary trader is "trading other people's leverage."

Proprietary trading firms’ sales pitches can sound very attractive to business traders who feel they do not independently have sufficient risk capital and leverage to make a living. Joining a firm to get access to "other peoples leverage" is the main attraction here.

Caution: Leverage can be expensive and dangerous. Leverage is not free; you must pay market interest rates for using the firm's capital. Trading with too much leverage can burn you out of positions faster and with bigger losses.

A key point to understand up front is that proprietary trading firms will strictly police how you use their leverage. These firms know they are attracting many unsophisticated (and new) traders and they strictly restrict your trading privileges. Almost all firms disallow overnight positions. They limit the securities you can trade, and they will force you out of positions when they like.

Some prop traders flourish under these restricted conditions, and they appreciate the firm's oversight and discipline. They do well with leverage, but many others burn out faster with leverage and lose their initial deposits and much more. Before you join a proprietary trading firm, carefully read the fine print and understand what you are getting into.
 
not to mention extremely high commissions, software fees, and other expenses that are coming out of own pocket. How does one evolve from a chop shop to a respected firm/ hedge fund manager? Well, everyone has to start somewhere...
 
Quote from spinoza:

Almost all firms disallow overnight positions.

They limit the securities you can trade,

they will force you out of positions when they like.
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Those blanket statements are not necessarily true. Many firms will give their traders total discretion over what and how they trade.

Prop firm as it's most often used on this site doesn't really refer to anything proprietary. It's just like you stated, the trader puts up money and gets leverage, good software and sometimes nice perks. Retail on steroids basically.
 
Seems like you should get discounted commissions and fees with any prop trading arrangement (even if you get stuck with one of those fake prop deals)?

Do you get solid discounts on commisions/fees as a "prop trader "?
 
Quote from quantzack:

Seems like you should get discounted commissions and fees with any prop trading arrangement (even if you get stuck with one of those fake prop deals)?

Do you get solid discounts on commisions/fees as a "prop trader "?
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compared to retail rates such as etrade or scotttrade it's better, and the execution is better as you get direct access broker. What I meant is that some prop shops charge extremely high rates compared to other prop shops.
 
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