excellent responses OP you gotta pick one thing and stick with it. shops are getting CRUSHED in NYC... just because you spoke to 5 of them does not mean you can open your own.
I myself am doing fine. Being short term profitable, I don't want to "brag" about anything because my short profitable trading career means nothing in the long term. And I have nothing to brag about. But I am clueless about running prop-shop from a business point-of-view. (it's because some friends wanted to do some business and need to have employees... ) What's wrong of admitting my weakness and asking?
The issue with the prop model to be 100% honest is profit margins are getting tighter and tighter. Where you use to be able to pay a trade 50-50 (or even less in some parts of the world) traders are now get upwards of 80% and what you can charge for comm has be dropping at a unbelievable rate. Most traders who will find in the prop industry loose money so you make nothing on them. It is a great business to get in to if you find one or two of those guys who can cover your expenses but really don`t expect to get rich in teh business, really until you have enough traders expect to operate at a negative clip for a while
Since I have a personal invitation, and urging from Maverick, I guess I can respond, LOL. First search the site for previous posts where I outlined the steps to setting up a professional trading firm. Pretty basic, not much has changed. Join an exchange via membership or permit holder. Form a Broker Dealer Get a good Compliance Officer Submit financials to a Clearing Firm to see if they will clear your trades. Minimums vary based on several variables at each place. In our case, we have been with the same Clearing firm since 1978 (Spear, Leeds, and Kellogg, which was acquired by Goldman few years back). Negotiate rates with Clearing firm. This can be a bit "iffy" - in at least one case, rates were quoted that were as much as our traders were paying at the time, which then made more sense for this group to simply become part of our firm, eliminate a lot of costly hassles. But, I suggest tryiing anyway. Be sure you have good Back Office - and someone on a desk who actually knows what the heck they're doing. Do not "trust" someone to handle risk, clearing, accounting....be really careful. Ours is all handled by family members. Then find traders to trade with you. Most who think they want to start a firm, generally find the group concept to work better. And, as others have said, that is more likely now than say, 10 years ago. If you have a group of traders, IMO it is "generally" better to simply have a group, not always. But if you're going into business together, you're "cross guaranteeing" each other anyway - do you really want to do that, LOL. If you want to know more, use PM - thanks. Don
Don, the question was about the business model for a prop shop, not the steps for starting one. In other words, where and how is the money made? I presume its from the traders, with the bulk of the money being made from training fees and commissions, not from profits made by the traders.
I'll tell you where firms make their money. Believe it or not, it's not from commisons anymore. Don makes some decent coin on the training fees (boot camp) etc. But the real magic is the lending of capital. Don can borrow money from GS for almost nothing now. Same goes for most firms. And they charge interest to the traders for leveraging that money. Now I know what some of you guys are thinking. How much can Bright or any firm really make on interest. I'll tell you. I'm going to use Bright as an example so as not to advertise my firm (you're welcome Don). Let's say Bright has 20 million in capital. And let's say through all the various pairs they trade they are able to deploy all that capital to their traders. Goldman will lend Don 6.5 times that 20 million in the JBO. That's about 120 million. Let's say Don can make 500 bp on that spread. That's a cool 6 million for swapping cash from a master account to a sub account. Let me put this another way. On that 20 million, they are earning 30% a year interest on that money almost risk free. Try getting that rate at your local bank. As the old saying goes, good work if you can find it. ps Bright is making more then 500 bp on that spread. I was being very conservative.
That's impressive return. I presumed he wouldn't charge more for leverage than mainstream retail brokers (which I think charge smaller clients a fortune anyway).
He's not. The magic is in the "fractional reserve lending". Just like the Fed, prop firms can create money out of thin air and earn interest on money that doesn't even exist. Yes, retail brokers charge high rates, but that is only on 50% of your margin. At Bright you might be borrowing 30 times your capital. That's 60 times a retail broker in terms of notional lending. Trust me, it's a good racket if you can do it.