I am not prop...i am buy side institutional. there is a prop firm business model that i dont understand. in the prop shops that GIVE you capital (not retail...but you are using firm moeny to trade) i understand that they want lots of volume to generate comissions. however, if it is the FIRMS money that you are trading..then the comissions coming back to the firm is just the same money they loaned out to trade. so how are they generating more money out of that? how do prop firms make money on comissions on the traders that are trading firm capital (assuming they are net zero or negative)???
They really do not give you money, they give you buying power that you trade and make profits on and the firm charges commissions. The money comes from the market and is taken out of your profits or deducted from your losses. Usually buying power is granted when you put up your own money so the firm is taking the commissions out of your own money or the profits you earn. If you blow out your account you are no longer allowed to trade. Now for those firms with 0% capital required the goal is make you profitable and take the % cut and commissions out of your profits. You usually are limited in your buying power but if you are successful and grow, the firm makes money off of you. This is how I think it is done, not 100% sure.
what does buy side institutional mean? could you more clearly state your question of this thread?, it seems like there are really three or more questions being asked in one statement
The general concept is the more volume the firm does, the lower their rate of commision fees from the exchanges on which they trade. Let's assume firm A gets a relatively low rate Let's say their fee happens to be somewhere between .20 and .80 per r/t per contract (futures)because all in all they do x amount of volume (everyone combined). By the same concept (economies of scale), they are able to pay relatively lower fees for virtually every trading expense (with the exception of rent) . So for example, while the lone trader pays 900.00 per month for CQG charts, firm A's expense might be 400.00 per seat because they happen to have a 20-seat package, and got a nice discount. The same concept applies to order entry platforms, news services, squawks, etc. The trouble is, sometimes these lower rates are not passed on to the trader. Now, their percieved value added to the newbie, as the OP suggested, might be the fact that there is 0% capital contribution required and you get to trade their money, get trained, and better yet keep 50% of what you earn in the markets with it. Sounds great, assuming you can make money in the markets. Here's the difference between a shiesty operation (the shops you here about on this forum with all the turnover), and the LEGIT pro-firms, or "trading arcades" as I've heard them referred to as on here... Firm A might have built profit into their "desk fee" albeit only a couple hundred dollars, while Firm B may pass all of their low and actual costs on to the trader. Firm A's PRIMARY OBJECTIVE is for you to make enough in profit from the market with the rope they hand you to cover the cost they will likely charge you in overhead, as a "desk fee". Unfortonunately, and unethically, they might explain the desk fee to be their ACTUAL costs, and insist that they are making nothing in profit from the charges you incur as a trader (front-end, charts, news, commissions, etc...). Whats better is if the trader can be net profitable in the market AFTER the desk fees. Everything else is just icing on the cake (they're entitled to 50% of your profit or whatever the split is agreed to be) In closing, I'll say that yes, there are honest and ethical firms out there that pass on their low costs directly to the trader, but there are probably far more Firm A's out there than Firm B's, as it applies to this niche of "proprietary trading". I challenge any shiester in a "trading manager/mentor/coach/recruiter" role at such a firm to refute the above comments... I'm sure someone in such a role will feel compelled to defend his/her firm on here and we'll probably hear comments like "not true... we are highly selective with out trainees and teach them our profitable system, we make all of our money as a firm from the profit we take from the market...we only make money on the split of profits our traders make, etc, etc..."
gotcha. seems like things are really tilted in favor of the firms ower then? so it is better to be an owner than a trader me thinks.
I got a couple questions: 1. What is the background of the guys who start these prop shops? Are they traders themselves?... would you need a series 7 also?... It seems deceptively easy.. buy a few computers with high speed internet.. get some fancy shmancy software and charge commissions. 2. If I was running a prop, I'd do things TOTALLY different. It doesn't make good business sense to try and blow up every trader that walks through your door. They are your customers...I mean wtf?.. Give a man a fish, and he'll be hungry tomorrow. Teach a man to fish, and he'll be fed for a lifetime.............. that's how i see it. but what do i know . cm69
I think if you check, you'll find that most owners and partners started off as traders...heck the money to buy seats on the Exchange, and get a Clearing Firm behind you, has to come from somewhere. And, how else can you teach (and keep) a few hundred traders if you don't trade everyday to keep up and adapt. Being a trader is virtually everyone's dream job...a few will make it, many won't. But, if you're going to do it anyway, you may as well align yourself with a solid group of experienced traders who can give all the right tools. I'll match my guys with anyone on the Planet. And, then, there's my brother..whose 2006 was better than 2004 (2005 was a smaller winner). www.stocktrading.com/trader10030.html I guess that might qualify an owner as a trader (besides it makes for good reading, LOL). We provide capital (without "using" the trader's money)..we provide access to trading platforms, and we provide training from basic to sophisticated advanced techniques via mentoring...as I said, the "tools" needed to make it. FWIW, Don
Yea, I wouldnt be so quick to jump to this conclusion, but generally, yes thats obviously true, as is the case with any organization. No doubt there are many credible groups out there where things are done right and there are successful traders.