How a US prop firm operate?

Discussion in 'Prop Firms' started by wonghang, Feb 14, 2012.

  1. wonghang


    Hi all,

    I am quite new here. I found there is a forum titled "Prop Firms" but in fact I am not working in this field. I have some questions to ask:

    Actually, how a prop firm operate? I cannot though of an equilibrium point such that the employees of a firm will stay with the firm.

    If I were an employee of a prop firm and I could trade with a profitable strategy, why do I stay in the firm and not trade on my own?
    If I were an employer of a prop firm, why do I trust the employee not stealing the firm strategies and then start up their own one?
    If the firm risks their own capital for the employee, IMHO, the firm will behave more like a VC than a prop trading group.

    I google on the internet and found that some firm offer some kinds of service like DMA, low-latency hardware, etc. I guess those firm is working like as a broker (sell side), right?
    How about the buy side? do buy side prop firms exist and how they operate?
  2. rmorse

    rmorse ET Sponsor

    Prop firms come in two flavors.

    Some raise money from partners and investors, hire traders and pay them a salary and a percentage of profits. The traders are employees.
    And, the other that is more typical on Elite Trader, the firm that has their own broker dealer, takes deposits from traders that become Limited B partners in the firm. That typically places your capital in a first loss position, and the majority of there profits stem from transactions, not your trading profits.

    The strategy you are allowed to run varies from firm to firm. So does all the details of your employment/limited partnership. Most prop firm are broker dealer and have an SRO that regulates them. As an employee/Limited partner, your required to follow the rules of the firm and be registered and licensed with them.

    You may call me if you have other questions. We are NOT a prop firm, but I'm very familiar with them.

  3. Maverick74


    It's very simple. The real prop firms that back you are going to hold back a lot of your money. A lot! Sure, you can leave. But it's going to cost you big time. In most cases, guys have to be willing to let 250k to 500k and in some rare cases, a million dollars go. Would you do that? That's a big price to pay to walk away.

    If you work for a prop firm where you supply the capital, they really don't care what you do or how much money you make. They make money on your commissions. If you are a size trader and threaten to leave they'll probably just cut your rates and you'll end up staying. Almost all prop firms offer rates far less then what you could get retail. But it's a choice you can make.
  4. Again, see: for a simple explanation of how the industry works. Some choose to be an employee, if they can find an actual job (check with Mav or a list of Chicago firms). IF you prefer to work for yourself, then perhaps putting up some risk capital is preferred.


  5. wonghang


    thank you very much all of you. I think

    Actually, I am not living in US (in HK now) and there is no culture of prop trading firm. I am just curious on how US prop trading look like.
  6. This is correct.

    A) Some firms pay a salary and and keep the majority of profits. Trading styles are typically pretty restricted. These are firms like Jane St., First New York Securities, Jump Trading, etc. They typically require a degree from a good university in a quantitative field of study. These are good firms to start with if you can get in because you have virtually no risk on yourself, however, if or once you decide to leave, you may find it difficult to demonstrate your performance history because it is generally proprietary property of the firm. If you have no risk capital to work with, your best shot is to do well in school and try to get a job here. There is no capital deposit, but your capital deposit will be a large % of your profits for as long as you can produce profits. Most firms like this are cut-throat and will fire you if you start to have loses.

    B) Other firms having investors (traders) signing up and depositing capital into an exchange-member broker-dealer. Some customers receive full-backing. Many traders choose higher payouts (sometimes 90-99%) Their capital is leveraged and the firms use economies of scale to provide traders higher payouts, lower rate, top-tier research, etc. It is far more of a business:business relationship than an employer:employee relationship. It's sink or swim here. I think it's fair to say that those who perform well independently will prefer this type of scenario. Either way you pay a deposit & trading fees.

    In both type of firms, The one who pays the piper calls the tune. In structure A, you can be let go pretty easily and don't have as much say in structuring your compensation, however, if you do not have any capital strictly for the use of risk, this is preferable. In structure B, the trader can consider themselves a customer of the firm and has the bargaining power of the buyer because switching to another firm is relatively easy and customers are very price sensitive in this field. even a .0005 change in commission rate or 4% more payout can cause someone to jump from firm to firm.