Great Article on Prop firms- Bright, Echo, Maverick Trading, SMB, etc.

Discussion in 'Prop Firms' started by mavericktrader, Aug 25, 2011.

  1. The Ambiguous Nature of Modern Prop Firms by John Knott

    Scour the the online forums and you will find countless threads asking what a prop firm is. Perusing the jobs boards and one will find endless listings of proprietary trading firms looking for high frequency traders. Even in the media there are countless references to prop desks at large banks and how they seem to be able to print money quarter after quarter. But what exactly is a prop firm and how does one get a job there.

    There certainly is a lot of ambiguity that surrounds these firms and for good reason. All these firms are very different with some being very easy to get into and others being almost impossible to get an interview. Let's start with a basic building block. The word proprietary does not refer to strategies they use but rather capital. It simply means, you are not a broker executing orders for clients but using either firm capital, your own capital or some combination of the two. This is an important distinction as it governs how these firms are regulated and the types of leverage that is available to them.

    There are many wanna be traders out there that often get angered when they apply to what they think is a proprietary trading firm only to find out that they have to make a capital contribution. This may be in the form of an training fee or a direct deposit into a pool of capital. The anger stems from the fact that they believe they should not have to contribute capital. These types of firms are of course the ones on the bottom of the prop food chain but their existence does serve a valid purpose. Not everyone can work on Goldman's prop desk. In fact, if one were to add up the total number of true proprietary firm backed traders in existence, they would find that there are more professional PGA golfers then true prop traders. Let me put this another way, you probably have a better chance of playing on the PGA tour then getting a firm backed position. Even if you don't know how to play golf!

    This means that most traders will have to settle for prop lite. Prop lite means you can join a "professional" trading firm where you can get "professional" leverage and perhaps even have access to highly skilled programmers and in house proprietary software, but you will be forking over your own cash. Is this fair? You bet it is. Because what is the alternative? Goldman is not going to hire you and the few true prop firms out there that back their traders have an endless supply of MIT, University of Chicago and Cal Tech graduates to choose from. In fact even among that highly skilled talent pool of Ivy League grads, even they have a better shot at playing professional golf vs getting one of these coveted jobs.

    And the bad news is, it's going to get harder. As more and more computers are trading around the clock in every corner of the globe, there really is no need to have a 24 year old kid with a mountain of college debt making discretionary decisions in fast markets with firm capital to enhance his ego or impress the girl he is going to hit on at the bar tonight. It's much safer and profitable for the firm to keep that guy in the back room writing software code where the only emotion he or she has to battle is boredom.

    It wasn't always like this. Not too long ago there were many ways one could break into the business while leaving their checkbook at home. For decades the tried and true method for breaking into the business was working on one of the many trading floors as a clerk. Kids as young as 18 would works summers and then full time carding trades for locals in the pits. It was a great way to learn the business, meet a lot of people, see how the markets function and learn how to trade. If you picked it up quickly and impressed enough people, one of them would put you on a badge and actually back you in one of the pits. Many of famous "Market Wizards" from the Jack Schwager trilogy got their start this way. But then the floor slowly went away and that door would close for good.

    In the late 90's and early 00's, we saw the emergence of the daytrading shops. While at first these early firms were what we call now, deposit firms, many of them fully backed their traders. One of the more famous ones was Worldco. But there was a reason why these firms could afford to take risks on new unproven traders and that was commissions. Lots and lots of commissions. The model was simple, bring guys in, charge them really high rates, give them incentives to trade as much as humanly possible and try to cut the bad traders as soon as possible and let the good traders ride. Sound familiar? These firms realized that they could make more in commissions then what they would lose in losses. The model worked well for many years until volatility slowly came to a halt around 2003. Once volatility dried up, so did the volume. And with the volume gone, so were the commissions. Firms simply could not afford to take the risk of backing traders without the commission buffer. Game over.

    Next up were the futures firms. With equities dying, suddenly futures became the big game in town. And they used a similar model to equity prop firms. Since futures are already leveraged, nobody wanted to take the risk of letting guys come in and swing for the fences, so most of these firms endorsed the spread trading model. They primarily traded the yield curve. By trading spreads, the commission income made sense and the risk traders were taking was more controlled on top of the fact that debt markets actually lended themselves well to spreading strategies. So once again firms could lean on commissions as well as rebates offered by the exchanges for providing liquidity to buffer against the losses they had to absorb from bad traders. Of course the bad news is, eventually volume began to dry up here as well and the same cycle begins to repeat itself.

    This led us to where we are today. The pay to play model. Technology has just gotten to the point where it can do everything you can do faster, cheaper and it doesn't eat, require sleep and or need a bonus and healthcare benefits. It's pretty hard to compete with that. But there are firms out there that will let you try, it's just going to cost you. Some firms will let you come on board for 5k, others want 25k to 50k.

    So why join one of these pay to play firms? There are several reasons. One of course is leverage and lots of it. Other reasons include lower commissions, better software and the ability to learn from others. Let me address this last point, the ability to learn from others. This is probably the last best edge available for newbie traders. The ability to sit next to and learn from other traders, particularly profitable traders. There is nothing better then gaining knowledge from those that came before you. It truly is as close to the holy grail as you are going to get. And I'm not implying that you are going to learn some secret method from these traders but rather you are going to learn a process. A way of looking at the market. You are going to get inside the head of other traders to see how they approach every trading day. Trading by yourself at home will never give you this opportunity.

    Is discretionary trading dead? This is often asked on online forums being that all one sees in the job market is ads for high frequency algorithmic traders with the ability to program in c##. No, discretionary trading is not dead and will never go away. But it's also not where the opportunity is. The real opportunity is going to be on the programming side. Or on the financial services side allocating money to these high tech quant firms. In the last few years we have seen an explosion in 3rd party software. We have seen the emergence of trading blogs with content that rivals that of The Wall Street Journal. We have seen the emergence of niche sites that provide information in very clever and unique ways for the every day trader. Of course there is also no end to the get rich infomercials and red light-green light trading systems.

    The deal now is, going forward, young men and women are going to have to work for it. If you really want to be a discretionary trader, you might have to get a night job. Or a day job while learning to trade markets over night. You are going to have to save your money and once you have enough capital, put it on the line and takes your chances. The success rate will be the same as it always has, low, very low. But the reward will be high.
    VPhantom likes this.
  2. that's some great points. I like to see prop as an alternative to retail trading for those who are willing to take the risk for the additional benefits. It does require experience and capital to be profitable. here is a great article on prop vs retail accounts:

    By: Adam Watson, V.P. Business Development

    Many newcomers to stock trading cannot tell the difference between a proprietary trading firm and an online (retail) broker. When deciding to open an account, traders make their comparison of brokers based on the relative cost and the products offered, but more often than not they fail to realize that the products are not exactly the same. This article seeks to shed light on the mechanics of a prop trading account and educate traders about the differences between the two options so that one can compare them more effectively.

    The analysis has been provided in six key areas: software, rebates, fees, buying power, education and short locates (availability of hard to borrow securities). These are the areas in which the two are most distinctively different and are rightfully the most common factors considered in this decision. You as a trader will place a different emphasis on particular categories as you consider whether retail or prop is best for you.


    Retail – Retail brokers typically offer the ability to execute trades on their website. Most also offer their own trading platform at a monthly cost to the trader. This fee may be waived if you meet their minimum requirements for account assets.

    Prop – A good prop firm will offer traders a choice between a few different direct access routing programs. A trader’s platform provides the ability to execute and monitor transactions quickly and effectively. A proprietary platform will have direct connectivity to the exchange matching engine. Hot keys are also a must have for intraday traders and are a feature offered in proprietary software, but not often that of retail firms. Most proprietary trading platforms provide access to more in depth real-time market data such as NASDAQ’s Totalview, ARCA Book, NYSE OpenBook, BATS and Direct Edge Books, although some of this data may come at an additional cost. Greater market depth and breadth can assist the trader in making better trading decisions on very active and heavily traded securities in real-time.


    Rebates refer to the compensation that ECNs provide to traders who add liquidity to the market. Most ECNs give rebates to traders who add liquidity and charge a slightly higher fee to traders who remove liquidity from their market center. This is a basic ECN business model, although there are a few ECNs that are structured differently.

    Retail – In the vast majority of cases, retail firms do not pass on rebates to their traders. The online broker will most often route the flow to a low cost exclusive destination which does not cost extra and is not often directly to an exchange. If a retail trader chooses to route to a particular ECN, the additional fee on top of their flat commission rate may be passed through to the trader.

    Prop – Traders who trade at a proprietary trading firm get the advantage of benefiting from the widely adopted “taker-maker” model that most exchanges offer. Traders who add liquidity will receive rebates for doing so in accordance with that exchange’s rates (which can be as high as $3/1000 shares). This can be a substantial source of revenue for the prop trader and will also influence his/her decision of which route to use.


    Retail – The fee structure for retail firms will vary from shop to shop and the industry is highly competitive. One firm may offer no account transfer fees while another may advertise no inactivity fees. Still another may not charge for wires, but they may make this up in their commission structure. In general, retail firms have a flat, per trade commission rate that is charged. There is also usually a software fee for the platform unless you meet certain minimum asset requirements or if you are a very active trader. Some other incidental fees that you may incur are those that have been mentioned above.

    Prop – Proprietary trading firms are able to offer more competitive commission and transaction fees than the online broker. Proprietary firms typically use a per share structure with breakpoints for decreasing your commission as your volume increases. This is often a direct benefit to intraday traders who have a high number of trades per day.

    All prop firms charge a software or desk fee which goes to pay for the data and order entry software that the firm uses. Some offer this software “at cost” to their traders and some charge a premium on top of their cost. The variety of routes offered directly affects the desk fee as well, so ask your prospective shop about the routes available when talking about desk fees. For some traders, more routes is more value added.

    Day Trading Buying Power

    Retail – In retail accounts, your buying power is THE LESSER OF the equity in your account divided by .30 (the 30% minimum global margin requirement for equities) OR your SMA multiplied by 2 (which satisfies the Regulation T requirements for equity purchases). For day traders, you must have at least $25,000 in equity in order to do more than three round trips (day trades) in a rolling five business day period (FINRA Rule 2520). Outside of this model, certain accounts may be eligible for portfolio margin.

    Prop – With a prop firm, your buying power is determined by the firm you’re with and the risk capital deposited. Some traders may be fully backed by a firm (true prop) in which case they can expect the firm to take a portion of profits to compensate for the risk taken. Many traders find trading prop more advantageous as they can trade a lot more capital that they would have access to in a retail account.

    Day traders with less than $25,000 are prime clients of prop firms as they are able to trade freely without worrying about the minimum equity requirements enforced by FINRA Rule 2520. This is because most prop firms are set up so that traders trade sub accounts of the firm, but the firm “hits the street” as one large account.


    Retail – Many retail firms have educational information on their website. The breadth, depth and level of educational materials vary from firm to firm. The material is usually in the form of suggested reading, archived lessons and, occasionally, trading seminars.

    Prop – Offerings for training in the prop field are highly sought after. Many traders who are beginning their trading careers look to prop firms with advertised training programs. Be cautious of firms that charge for educational classes and then provide firm capital for you to trade. Some of these firms are modeled to generate revenue from training which can cause a conflict of interest as their incentive to see traders last in the long run is greatly reduced. When a trader joins a prop firm and deposits risk capital, all compliant firms are required to hold your deposit for 12 months. Afterwards, the trader may receive his/her deposit back. In short, be aware that if a firm charges for training they may be trying to avoid the lock up period so they can treat it as revenue immediately.


    All traders, prop and retail, are subject to Regulation SHO which governs short selling in US markets. Traders must have located shares that they wish to borrow before selling short. Some stocks may be on the threshold list or “hard to borrow” list and may not be available. This list is updated every 24 hours.

    Retail – If a retail trader would like to short a stock on the threshold list, there may be little that can be done to locate additional stock intraday and an opportunity may be missed.

    Prop -Traders with a prop firm may submit locate requests before and during market hours in order to locate additional shares of stock on the threshold list.

    As it happens, most traders begin trading in retail accounts due to their accessibility and pervasiveness in the investing community. Too many traders are unaware of the options available to them when it comes to cost structure, service and performance. It is my hope that this article will dispel some of the mystery and stigma from prop. Looking at these six areas, you can better determine if your style of trading is more suited for a prop account, or if you would be better off opening an account with a retail broker.

    When choosing a firm in either category, research is paramount. Make sure your broker or trading desk has a sound reputation and make sure to ask the right questions. Talk to traders or read reviews on forums and trading websites. The better informed you are from the onset, the better your experience will be and the more comfortable you will be doing business with them.

    Happy trading.
  3. Great articles guys. I read the bashing some of the posters leave here on Elite trader about prop firms which is ridiculous. The complain about this and that and nothing is ever good enough. It always comes down to one thing they complain

    If a firm requires them to put up a risk deposit, then it is a scam

    If a firm requires a desk fee, then its a scam

    If a firm requires a two year track record, then its a scam

    If the firm requires you to take and pay for education, then its a scam

    These are the leeches of society that want something for nothing. Here are firms willing to put 50,000-500,000 of buying power in your hands yet they don't want to pay anything for it. Trading prop is way better than trading retail. Retail always looks "cheaper" on the outside but you get what you pay for. Trading prop is the best way to trade in my opinion as stated in the post above. You get better leverage, better trading rates, better support, better guidance and a built in group of traders that all work together. Those reasons right there can totally make a difference between success and failure. However, this does have a cost and some people are too cheap to pay it and keep trading at TOS or eTrade because its "cheaper".

    So what do they do? Come on to elite trader and say everything is a scam. They don't have anything else to do. Find a good firm, understand all the costs involved and make a good decision. If it's not for you, then go find a different one. But as you sort through the posts on elite trader, take everyone's negative opinions with a grain of salt. There is a lot of that on the internet now.
  4. Great article indeed.

    Was John Knott ever a trader at a prop firm?

  5. You make valid points.

    I have a few questions but I'll just ask one.

    Could you name a prop firm that has education/training that is actually profitable?

    I am beginning to think that firms that DON'T offer training or make you take classes for free or for a fee, is actually the better firm.
  6. This is what a UK prop trader said:

    TimYoung is offline Junior Member

    Join Date
    Jun 2011

    Good stuff. Really informative article. There is one thing that I don't agree with tho. I don't know about the situation in the US but in the UK most of the good prop firms are either free and or even pay you a small salary to join them. If anything most prop firms that ask for payment are usually scams.

    So, even traders in the UK feel the same way as traders in the US. WHY?
  7. """"The deal now is, going forward, young men and women are going to have to work for it. If you really want to be a discretionary trader, you might have to get a night job. Or a day job while learning to trade markets over night. You are going to have to save your money and once you have enough capital, put it on the line and takes your chances. The success rate will be the same as it always has, low, very low. But the reward will be high.""""

    I don't see how this has changed. I think the barriers to entry are actually getting lower. Ie.. Borrow or save some money, get your 7, and suddenly you're a trader. Hell, I remember borrowing 15k back in 1996 and getting 2 to 1 BP, and paying 3.5 cents per share. Later I learned it was absurd, but it was all I knew.

    New traders have always needed night jobs, unless you're lucky right out of the gate, or you have some backup.

    And as if we didn't have to work for it years ago. Absurd.
  8. Haha! These message boards are so absurd. I just put out a post saying how I read through these boars and people jump on and say scam this and scam that and how they are just people that don't understand the business.

    In just two posts, here they come. Scam this and scam that. How lame. Didn't they read the second article where someone logically breaks down the advantages of prop trading versus retail trading? Don't you understand the cost benefits from prop trading with lower commissions, ECN rebates, access to short stock, etc?

    But as I said, it always comes down to upfront money. Someone please tell me how a prop trading firm who requires a risk deposit/training for 5K and will provide you with 25K buying power is a scam? That sounds like a pretty good thing to me. Oh wait, remember what I said earlier?

    If they have a risk deposit, they are a scam

    If they have a desk fee, they are a scam

    If they require training, they are a scam

    Here they come out of the woodwork just like I said they would.

    Again, it all comes to upfront costs. Please someone explain to me how the prop model is a scam? They bring you in, provide you with training (I guess if the training is not good it might be), provide you with way better software than retail, provide other traders to interact with, provide better liquidity, provide better commissions, give ECN rebates, etc in exchange for a fee. I guess you want this all for free.

    I think where people are getting confused is that all a prop firm is doing is providing you a service, just like a broker dealer like eTrade, TOS, Interactive Brokers, etc. Whether you succeed or not in your trading isn't the fault of your broker...It's yours. They provided you the tools to get into the business like you wanted but the results are all yours.

    I think people are getting caught up with the implied idea that if you join this firm as a "professional" trader, you will have success. But guess what? Everyone does that! All brokers advertise about how their system is the best and has the best tools and if you had it, you would be a master trader. All software companies advertise their products and imply that if you use this product, you will be a great trader. Hell, even budweiser commercials give me the perception that if I just drink a 6 pack of bud that I will attract the hottest girls and have the time of my life. It's called advertising people. Yet, no one calls Think or Swim a scam or even budweiser a scam. They are a company providing a product or services, just like a prop firm. What you do with their product or service is up to you.

    I am pretty sure that this post was a complete waste of time and wont stop the Scam, scam, scam talk. Oh well. Hopefully rational people can get some meaning out of it.
    VPhantom likes this.
  9. I guess friendly discourse went out the window. This will be my last post.

    The first thing you need to understand is you are not being hired. You are not getting a job. You are not working on the desk at Goldman.

    And concerning training, where in your entitled little fantasy world do you think that training guarantees you success? Guess what? I went to 4 years of "training" at college, spent $35,000 and learned some truly worthless stuff. In my opinion, it was mostly a waste of time taught by people without any real world experience. But guess what, I don't come on to message boards and proclaim, "College is a scam. Don't go." I took some really great things away from my experience such as finishing assignments, learning how to study, etc. All college is is information given to you. What you do with it is up to you. That is all that training is.

    You sound like a very entitled little boy who thinks that trading success can be found in a book or free on the internet. It comes from getting your ass kicked time and time again until you finally figure out not to do it anymore.

    By the way, I have traded with both Bright and Echo. Both firms have delivered exactly what they promised: software, capital and training. Their training was ok but it was just info. I ended up losing money at Bright but I admit it was all my fault due to lack of consistency. I didn't come on to a message board and cry like a little bitch that Bright took my money. They provided exactly what they said they would. I have been with Echo for 3 years now and am doing ok. Not because of Echo...because of me.

    I am not going to engage any more in this discussion since in has degraded just like I predicted in my first post. Isn't the internet wonderful! Good luck to all.
  10. This is an extremely myopic view of prop trading, imho.
    #10     Aug 26, 2011