Why would successful traders join/stay in a prop firm?

H

HotTip

This is meant as an innocent question, because I've never been in a prop shop nor do I know anyone who has. But, if a trader was consistently successful, making $200K+/yr, and his account was large enough to finance his trading with the margin offered by regular retail brokers, is there any financial reason for him to join or stay in a prop shop? Especially now with retail commissions coming down it's hard for me to understand why that trader would want to have to shower and drive to an office to trade. I'm sure there's camaraderie and idea sharing, etc., but I'm wondering if there are also financial considerations.

It seems to me based on my minimal knowledge of prop firms that the people who join them are predominantly newbies who need training, equipment, and BP -- things that aren't necessary once a trader has reached a certain level of success. Do prop traders who eventually become successful eventually leave the firms to trade on their own?
 
You nailed it, in your first paragraph, it's a camradrie, sharing ideas, also if your good, prop firms, have unlimited access to capital. Also as a trader you don't have to pay commissions or large trading fees, just the ecn's fees, gateway fees. and so on. Just come and make bank. But the key is unlimited access to capital if your good.
 
But again the question is subjective. If you make $1mil by yourself or $200K, that's not bad. The thing you want to ask is that does the prop firm pay more, for what you are doing now. Can you make more than $200k with the system you have now with the prop. firm.
 
one bad thing has been the occational -oops-

where a prop shop and its traders stopped
trading due to financial difficulties and irregularities
etc ... so I guess one might want to keep as little
as possible or make sure there are enough safeguards in place to prevent any such thing
happening at -prop shop -
 
There are many more reasons. Risk based haircuts for equity options if you trade options. Cross margining on futures. The ability to raise capital and start your own funds and have back office support and have somebody run the fund for you.

Access to information and order flow. The ability to work with in house programmers that can custom write software for you.

There are really a lot of reasons. I know a lot of guys on ET all talk about starting hedge funds. Problem is, they don't know anyone with capital and they trade in their basement. Something that really impresses people. LOL.

I guess it comes down to whether or not you want to take this business seriously or if you just want to sit at home and trade while you watch Oprah in your pajamas.
 
It's all about buying power, for me anyway. I trade at home and don't need or want to be in an office. But I employ strategies that need millions of dollars in buying power to be viable.

I'd probably take a 80% pay cut if i traded with retail margin, and I've got a 6 fig retail account. Buying power is a huge edge, if you know how to use it properly.
 
A good broker will extend more leverage once you have built a track record and he/she is confident you are risk adverse, that will probably come close to that of an arcade. When ever I have asked my broker for reduced margins, she is always willing to do so.

I doubt faceless monoliths like IB will do this though.

I think it is important to make a distinction here though.

If the firm asks you to trade your own money, you are at an ARCADE.

If the firm provides you with capital, you are trading PROPrietary.

That is how it is here in London anyhow.

If you trade at an arcade 100% self funded, you get to keep 100% of profits. If the arcade provides 50% margin, you only keep 50% profit - yet still have to pay the fees.

So where is the benefit of going to an arcade? Yes you may have quicker connections etc, but that is really only necessary if you want to scalp the book IMO.

If the arcade cn introduce you to other capital to trade other than your own, then I see the advantage, as there is less risk with others money - and a good trader always considers risk first I believe.
 
What haircuts are you getting for equity options? Two prop shops I spoke with stated 1:1 margin, i.e. $75,000 in, $75,000 buying power, which is what one gets from retail. I was looking for overnight buying power and 1:1 is all I was quoted.


Quote from Maverick74:

There are many more reasons. Risk based haircuts for equity options if you trade options. Cross margining on futures. The ability to raise capital and start your own funds and have back office support and have somebody run the fund for you.

Access to information and order flow. The ability to work with in house programmers that can custom write software for you.

There are really a lot of reasons. I know a lot of guys on ET all talk about starting hedge funds. Problem is, they don't know anyone with capital and they trade in their basement. Something that really impresses people. LOL.

I guess it comes down to whether or not you want to take this business seriously or if you just want to sit at home and trade while you watch Oprah in your pajamas.
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Quote from optioncoach:

What haircuts are you getting for equity options? Two prop shops I spoke with stated 1:1 margin, i.e. $75,000 in, $75,000 buying power, which is what one gets from retail. I was looking for overnight buying power and 1:1 is all I was quoted.
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One to one is not a haircut. A haircut is what is offered to market makers, a risk based haircut I should say. A haircut is where you are not putting up the notional value of your position but rather the risk capital. Using the word leverage to describe it is rather tricky. Because it can be anywhere from 10 to 1 to 100 to 1.

Haircuts usually consist of using the max loss your pos would incur today with a 15% up move and 15% down move in a stock. With indexes it's 10% for nasdaq and for the dow and s&p it's 8% to the downside and 6% to the upside. This is all you put up. Everyday your haircut changes as the underlying moves.

The biggest advantage to haircuts is not the initial leverage, for lack of better word, but rather the fact that when you make adjustments to your position, rather then having to put up more capital, you put up less capital. This allows you to trade the underlying at will, trade synthetics, and lay out premium at no cost.

When one is long gamma, since there usually is no risk outside of daily decay, the exchange makes you put up a minimum of $25 per contract on equities and 1$ per contract for indexes.

So an example. If I bought 100k worth of long NDX premium today, at IB, I would have to put up 100k in cash, with a haircut account I might have to put up 1k. That's it. It's a huge difference.

I personally do not believe it's possible to trade options for a living in a retail account. You need haircut margins unless your managing OPM in large amounts. Even then, it's beneficial to have a haircut account. I hope this helps.
 
Thanks for the explanation.

So basically they are requiring you to put up what you would lose in a given moment, not the full cost as in a retail account. I was looking for ways to apply my credit spread approach on better terms than I get at retail (I know you are not a fan of the strategy so just hunor me ;) ). The best I can do at retail is have my margin requirement invested earning 4 - 7% on average but it is still 1:1.

I would much rather get the haircut as you described so that what I am really responsible for is the daily marked to market 8% range you mentioned for SPX so that I can do more contracts further OTM for better returns. I like the risk management approach of simply cutting off the trade when my haircut requirement reaches a certain amount (i.e. a predetermined loss amount) and also have access to the the leverage for hedging purposes on the way down or up. Perhaps I misunderstood what info I was getting.

So if I opened a deep OTM put spread, the haircut could be about half of what I would need at retail. I can then use the same haircut for cheap partial hedges and manage my risk better. Or as you said partial hedges could in effect reduce my haircut. Having access to that haircut and options on futures would make it more viable for me. I would need to analyze it more of course but I was not getting how they would charge haircuts.

Thanks for the explanation!

You are right, trading options for a living in retail is an uphill climb because you need a lot more money to make it and I am still trying to get my stake into the mid 6 figures.

Phil

Quote from Maverick74:

One to one is not a haircut. A haircut is what is offered to market makers, a risk based haircut I should say. A haircut is where you are not putting up the notional value of your position but rather the risk capital. Using the word leverage to describe it is rather tricky. Because it can be anywhere from 10 to 1 to 100 to 1.

Haircuts usually consist of using the max loss your pos would incur today with a 15% up move and 15% down move in a stock. With indexes it's 10% for nasdaq and for the dow and s&p it's 8% to the downside and 6% to the upside. This is all you put up. Everyday your haircut changes as the underlying moves.

The biggest advantage to haircuts is not the initial leverage, for lack of better word, but rather the fact that when you make adjustments to your position, rather then having to put up more capital, you put up less capital. This allows you to trade the underlying at will, trade synthetics, and lay out premium at no cost.

When one is long gamma, since there usually is no risk outside of daily decay, the exchange makes you put up a minimum of $25 per contract on equities and 1$ per contract for indexes.

So an example. If I bought 100k worth of long NDX premium today, at IB, I would have to put up 100k in cash, with a haircut account I might have to put up 1k. That's it. It's a huge difference.

I personally do not believe it's possible to trade options for a living in a retail account. You need haircut margins unless your managing OPM in large amounts. Even then, it's beneficial to have a haircut account. I hope this helps.
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