Why Prop??

Originally posted by rtharp

You may notice something. All of the professional traders once they have been at a professional firm will never go back to trading at a retail firm. But retail traders who wonder about professional/proprietary firms have never traded there
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Robert had posted this statement a long time ago in another thread and at the time I considered it somewhat questionable. But several months later I have yet to meet anyone to suggest anything to the contrary. While my ultimate desire would be to be able to live and trade in a similar manner to what Tony Oz is doing now, the reality is that at this moment I am cutting myself short by not searching for and utilizing everything I can to become a better trader.

Aside from the obvious benefits of a prop/pro firm that have already been mentioned (Bullets, leverage, learning opportunities, etc.), I think there might be a few more. One might be learning what strategies do not work without it costing you money. There will always be traders who will fail. Why not learn from their mistakes? When you come up with a new idea when trading at home, you can backtest and papertrade, but you really won't know until you trade it. At a firm, there just might be someone doing something similar to your idea, and whether they are successful or not, you can learn something from them.

Another benefit might be discipline. I think most agree that discipline is one of the greatest attributes of the successful trader, but I am speaking of it in a slightly different manner. What I am referring to is the discipline to spend your whole day in a productive manner to educate yourself in trading. At a firm, you will have a trading environment with fewer distractions. I know that there are many of you who successfully trade at home who are very disciplined, but I always considered myself a very disciplined person, and the fact that I know who the guest was everyday on "The View" is an extremely scary and disturbing fact. Perhaps it's just me, but I have a habit of undertrading instead of overtrading. I suppose that it's the lesser of two evils, but I'm not content with it.

On a lesser note, there's also reliability. I know, problems occur whether pro OR retail, but I was not able to trade this whole week because of a virus that messed up my whole network. Yes, I should have a backup system - another dedicated computer with a cable modem instead of DSL (shame on me) but if you could see how small my apartment is you'd understand. Just bad luck, but very frustrating.

So while I have the utmost respect for the traders who are able to do it from home, I have found that for me personally there are too many unnecessary obstacles in the way. I am throwing in the towel and will look to join a firm after the new year...

DeeMan
 
Originally posted by Slave2Market
...you can use Mark-To-Market accounting and not pay the Social Security tax (same as prop firm), ...The biggest advantage of filing Schedule C, is that you have numerous options for reducing your taxable income I.e. SEP-IRA, VEBA Trusts, LLCs etc.
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I was under the impression that if you can use the Mark-To-Market method and not pay SS tax, then that is not considered "earned income" and you can only get the benefits of a SEP, IRA, Keogh, etc. with money that is classified as "earned income". Are you saying that you know of a way to be able to use these products with money that is NOT classified as "earned income". If so, please let me know as I'd like to know more about this.
 
Originally posted by Smikkey Trader
I never said I was trading $30,000. I said that a new trader with $30,000 could learn on his own, using the new margin rules.

Let's say my stake was $200k. Thats $800k in daytrading buying power (which is more now than I use). I never hold more than 10% overnight, and thats extreme cases. My preference is to never carry, which I adhere to nearly every time. The only time I bend this rule is if Im profitable. I NEVER carry losses to the next day.
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I definitely agree with rtharp when he said:
Ok so let's say you have $200,000. One of the benefits of LLC's is you can take $150,000 and put it somewhere else maybe some real estate , CD's or such. Trade with just $50,000 with the exact same kind of mindset and more buying power than the $800,000 you would normally have. That's the advantage of how Professional firms can work.
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Another thing that is good is when it comes time for accounting. With professional firms, you get a K-1 and hand it to your accountant - their work is then quick and cheap. With retail, you hand them your trading records (elecronically if you're lucky). They crunch through them and you have a big accounting bill. I know this from watching my accountant wife during tax season as she does taxes for both professional and retail traders.

I also re-iterate what I said about certain order types that are not available with retail accounts such as "opening only" and Market-On-Close. (some retail accounts may have these and if they do, someone please enlighten me).

The question for the individual trader is if these three points make it worthwhile to be a prop trader. For some it is, for some it isn't. Just like each trader must pick a trading style that is right for them, they must also pick a firm that is right for them.
 
Originally posted by Slave2Market
Don,

I have to tell you that I am with the right firm :)

If you know of a way to defer taxes on my trading income please tell me. I'm talking about a way to shelter some of my income for retirement purposes I.e. SEP-IRA, Keough, VEBA Trust etc. To the best of my knowledge and my accountant's, this is not allowed as a member of an LLC :(

If I was filing Schedule C, there are several methods available to potentially shelter a huge percentage of my trading income.

Regards,

Slave2Market
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We choose to be exempt from Self Employment tax which saves us 15% directlyevery year, and we can put that money wherever we want, and it's hard to beat that kind of deduction. To qualify for the other type of tax deferrals you have to pay SS tax, and then it is self defeating. The important thing to remember is, of course, that it is better to worry about tax problems than the alternative (not having to pay taxes)..:)
 
Originally posted by Don Bright


We choose to be exempt from Self Employment tax which saves us 15% directlyevery year, and we can put that money wherever we want, and it's hard to beat that kind of deduction
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Yeah but then I won't get my big fat social security check when I'm 65?! :)
 
Originally posted by DeeMan


Robert had posted this statement a long time ago in another thread and at the time I considered it somewhat questionable. But several months later I have yet to meet anyone to suggest anything to the contrary. While my ultimate desire would be to be able to live and trade in a similar manner to what Tony Oz is doing now, the reality is that at this moment I am cutting myself short by not searching for and utilizing everything I can to become a better trader.

Aside from the obvious benefits of a prop/pro firm that have already been mentioned (Bullets, leverage, learning opportunities, etc.), I think there might be a few more. One might be learning what strategies do not work without it costing you money. There will always be traders who will fail. Why not learn from their mistakes? When you come up with a new idea when trading at home, you can backtest and papertrade, but you really won't know until you trade it. At a firm, there just might be someone doing something similar to your idea, and whether they are successful or not, you can learn something from them.

Another benefit might be discipline. I think most agree that discipline is one of the greatest attributes of the successful trader, but I am speaking of it in a slightly different manner. What I am referring to is the discipline to spend your whole day in a productive manner to educate yourself in trading. At a firm, you will have a trading environment with fewer distractions. I know that there are many of you who successfully trade at home who are very disciplined, but I always considered myself a very disciplined person, and the fact that I know who the guest was everyday on "The View" is an extremely scary and disturbing fact. Perhaps it's just me, but I have a habit of undertrading instead of overtrading. I suppose that it's the lesser of two evils, but I'm not content with it.

On a lesser note, there's also reliability. I know, problems occur whether pro OR retail, but I was not able to trade this whole week because of a virus that messed up my whole network. Yes, I should have a backup system - another dedicated computer with a cable modem instead of DSL (shame on me) but if you could see how small my apartment is you'd understand. Just bad luck, but very frustrating.

So while I have the utmost respect for the traders who are able to do it from home, I have found that for me personally there are too many unnecessary obstacles in the way. I am throwing in the towel and will look to join a firm after the new year...

DeeMan
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The discipline is a huge one. I loved trading remote. But the difference of driving 3 blocks to an office is huge. By having an office seperate from my condo I can seperate my personal and business life much more easily. When I enter the office I am there to trade.


First no distractions. I don't have girlfriends coming over to talk about their problems. No annoying phone calls.
The cost of equipment is the next thing. Having 3 Point to Point T-1 lines -2 of them on different networks by different providers is a huge cost but then another one for backup is is too much for me to pay on my own. Then there is the dual pentium computers I'm trading on, First Alert and a satalite for backup quotes, a squwak box running in the backgroud, a dry erase board with a ton of info posted about what the office is doing.

Then there are the traders sitting next to me. My dream is to eventually have an office somewhere really nice and the majority of traders in the room are some of my father's top clients. We are talking about the big guns and running ideas off each other of what to do. A trading office can be an emotional blackhole if it grows too fast and there aren't many profitable traders around. If this happens you don't want to be there --it was one of the things that kept me out of an office,--as I knew what this was like being on the floor of the 30-Yr Bond Pit.

On the other hand if 3 or 4 highly profitable traders are in the office and new guys just slowly come in who are trained by the others than the office soon can have this huge positive energy that flows for a trader. This is what I'm slowly doing for the Phoenix office I'm working on. It was great 2 weeks ago I was doing my homework and found something that usually is profitable 80% of the time. The entire office joined me on this trade which easily paid for our monthly cost of the office for each of us. I post on the dry erase board some longer term day/swing trades for them to participate in if they wish. I'm out of town but anyone is more than welcome to pay us a visit for a few hours to see what is going on. Traders who are with the firm are allowed to stay as long as they need/want.
 
Slave2Market, you mention that if you are trading with an LLC you can pay up to 39.6% in taxes. This 39.6% would also apply,if i'm not mistaken,if you are an investor holding stock for less than 1 year since it is all short term capital gains. And even an investor can't put their gains into a deferred retirement plan since it is all unearned income.
 
"...One of the benefits of LLC's is you can take $150,000 and put it somewhere else maybe some real estate , CD's or such. Trade with just $50,000 with the exact same kind of mindset and more buying power than the $800,000 you would normally have. That's the advantage of how Professional firms can work.

This is an excellent point and I'm glad you brought it up...I had never looked at professional trading from that POV... it makes sense to me and I'll want to take another look at joining a professional firm sooner rather than later.

One question for you Rob, lets say that I want to trade remotely...it would make sense that before actually going live with the firms money I should spend a few weeks at one of your branch offices. What is your firm's position on this? Are remote traders advised/required/invited to do this? It sure seems like a good idea to me...

Best,
Jim
 
DeeMan,

I have traded solo from home for a long time and always thought it was the way to go. You make a very good point about discipline however. There is another cost associated with trading from home that RTharp alluded to. Everyone knows you're there, from your unemployed friend who wants to chat on the phone to the tennis or golf buddies to, and this is the killer, your wife or sig-other. That means you are expected to deal with all repairmen, cable guys, yard guys and do all the airport runs. Airport runs have literally cost me enough to buy my own limo service and have it on call for family when they visit.LOL. Try telling your mother in law to get a cab and you'll reimburse her. Hey, you're just sitting around the house in your underwear, right?
 
I don't want to turn this thread into a tax discussion, but I was trying to determine if I was possibly missing some method of
deferring taxes on my income. If I were to file as a Trader via Schedule C (not Mark-To-Market), I would pay Self Employment tax on only the first $80K (approx) of earned income, I would pay the 2.9% (medicare?) tax up to infinity, I would be able to write off all my expenses, I would be able to write-off $20K (section 179) worth of computer equipment each year, and depreciate any equipment above that number over 5 years, but most importantly ... I would be able to set-up a retirement plan (or trust?) that would allow me to defer taxes on a large percentage of my income (according to my accountant). This tax savings will dwarf the Self Employment tax that I have to pay, so being exempt from that tax is a non-issue. I will be able to invest/trade this retirement account (tax free), until age 65. This could result in a huge sum of money! Being an LLC prop firm member (a satisfied one at that), I use Mark-To-Market accounting which saves me the Self Employment tax (small potatoes), I must depreciate computer purchases above $1,000 over a 5 year period (kind of ridiculous, but that's the rule), but most importantly - I have no method of deferring taxes on my income. So being a prop firm member, does have a major tax drawback ... at least according to my accountant. As I said before, I believe the benefits greatly outweigh the tax consequences, but if somebody knows a method to save on taxes ... please post it. As a trader, I take all the risk and Uncle Sam gets 39.6% of the reward ... I just want to defer some of that reward.

Regards,

Slave2Market
 
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