What is a prop firm?

Quote from ScalperJoe:


Unlike a retail account, the funds you place at a prop firm are NOT insured by SIPC, so if you have a "decent amount of funds, 100k+" then you can decide what portion of that amount you feel should be at risk.
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This is an interesting point. Does this mean you have a counter-party risk with the prop firm? In other words, would you lose your deposit (and any accumulated profits) if the prop firm terminates due to bankruptcy or fraud?
 
Quote from Trader13:

This is an interesting point. Does this mean you have a counter-party risk with the prop firm? In other words, would you lose your deposit (and any accumulated profits) if the prop firm terminates due to bankruptcy or fraud?
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Yes.
 
Quote from Trader13:

This is an interesting point. Does this mean you have a counter-party risk with the prop firm? In other words, would you lose your deposit (and any accumulated profits) if the prop firm terminates due to bankruptcy or fraud?
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From the CBOE.org regulatory circular (RG 10-101), which contains the following:

"Capital contributions must be locked-up for one year; and
Funds invested as capital are subject to all the risks of the broker-dealer, including risks related to other traders losses."

Asking to review the financials of a registered prop firm that has oversight from their SRO (self-regulatory organization) is perhaps the best way to measure the strength of a company.

Of course, there is always an inherent risk with any business.

Whether you would "lose your deposit or any accumulated profits if the prop firm terminates due to bankruptcy or fraud" is a legal question so I'm not sure.
 
Quote from KINGOFSHORTS:

Yes.
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If you pick a financially weak firm, I suppose this counter-party risk could exceed the market risk of trading itself. This suggests a due diligence review of the prop firm's financials (ideally by a CPA firm familiar with prop firms) should be conducted before committing any funds.
 
Quote from ScalperJoe:

The amount of capital required and profit split will vary by firm. You also get to lever up your capital at a greater rate than a standard retail account. The best way to learn at a prop firm is by watching how other successful traders interpret the charts, and then by implementing a strategy that suits your personality and style.

Unlike a retail account, the funds you place at a prop firm are NOT insured by SIPC, so if you have a "decent amount of funds, 100k+" then you can decide what portion of that amount you feel should be at risk.
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Another aspect of this is that I advise many traders to keep the "big money" scattered among FDIC insured banks (remember only about $250k in actually insured) - and then put $20k-$50k or so with us to "use" our capital. Seems to make sense. Even though you "could" put up $millions to trade with, you don't necessarily have to.

Funny point, however. Over the last few years - traders have actually closed bank accounts and brought money over to us - and some, during the financial crises took some out, then brought it back.

Heck with the low interest rates GS gives us, Bob and I both have money scattered other places, LOL. Ally and GE capital pay much more (not a recommendation or anything, personal comment, nothing to do with Bright Trading or any affiliated business etc.)

Regarding hold period. We don't have to use trades capital to meet our firms trading requirements, and do not hold initial deposits - normal 30 day notice if you resign to get your funds.

FWIW,

Don
 
Quote from Trader13:

If you pick a financially weak firm, I suppose this counter-party risk could exceed the market risk of trading itself. This suggests a due diligence review of the prop firm's financials (ideally by a CPA firm familiar with prop firms) should be conducted before committing any funds.
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One item to look for in the financials is the Class A vs. Class B capital, which will give you an idea of how much capital the firm itself has placed (Class A) vs. the capital contributions from its traders (Class B), and then do a year-on-year comparison to see if there is any material change within the numbers.

What you will notice is the registered prop firms that require a Series 7 are better capitalized compared to some of the CBSX-only firms. Of course, the regulatory changes and new proposed exam requirements may have an impact over the course of the year, so I agree with Trader13's comments suggesting a due diligence review before committing any funds.
 
Quote from momentum007:

Most prop firms are designed as LLC's whereby each member contributes a minimum of $5k for their account, which allows about 10 to 1 buying power/leverage. Commissions charged could range from anywhere between $4/1000 share trade to $9/1000 share trade based on your average monthly volume. Most firms have plenty of T-1 lines so the speeds are very fast, news services are subscribed to and are usually free. Most firms use tradethenews.com and also subscribe to a news reader service. Many of these LLC's are backed by larger capital management firms. They also allow for you to trade remotely from home, and you can be skyped in to hear what's going on in the home office. At the end of the year, you get a K-1 statement of your earnings for tax reporting purposes and because you are part of an LLC, you have more write-off opportunities when doing your taxes. It's best to discuss this with an accountant. Any further questions, send an email to info@mtginvestments.com.
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Any reason why you keep spamming every thread on the prop forums?
 
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