How to make sure that a prop trading firm is solid?

Discussion in 'Prop Firms' started by proptrader911, Mar 22, 2012.

  1. Hello everyone,

    I would like to ask you how a trader can be sure that the firm he is doing business or about to do business with is solid? I don't know about you guys but I feel reluctant to sending money to a firm that I have never done business with and would like to have done a due diligence before proceeding.

    Could you be kind enough to tell me how to perform proper due diligence on a prop firm? What information should I be looking for?

    Are all of the prop firms registered with the SEC or the Canadian Securities Regulatory authority?

    In general I would like to know as much information as possible about how one trader can be protected from unethical prop firms.

    Any info would be greatly appreciated.

    Thank you in advance.
  2. Here are a bunch of questions you should be asking:

    1. Do you allow traders to trade remotely?

    2. Do you require Series 7 or Series 56?

    3. What are your commissions rates?

    4. What’s your payout split?

    5. Do you pass back exchange rebate fees?

    6. Do you offer advanced order routing mechanisms? Do you have access to midpoint routes and dark pools? Please elaborate

    7. Do you have special relationships with floor brokers (floor routes)? If so please describe the fee and rebate structure?

    8. Do you have a capital contribution requirement? If not, please describe any risk management parameters (such as max drawdown per day) that you have.

    9. Do you offer preliminary & on-going training and is it offered FREE?

    10. Please elaborate on how much buying power you provide? If this depends on capital contribution, please elaborate on that too.

    11. How do you process payouts to your traders?

    12. What trading platforms are available to traders? Do you charge a platform fee?

    13. Please describe any other fees that you require traders to pay?
  3. I see you have this covered Evo, just add that they should check financial statements. And be sure that they allow the trade to determine when they draw money out, not the other way around. We do weekly of course, but even if it's monthly, make sure the trader is in charge, after all, it's their money.

  4. Thank you guys for your help. I greatly appreciate it.

    I have noticed in some of the other threads that people talk about registered firms. Could you please explain me how to check if a firm is registered and in what way am I protected if I work for a registered firm, instead of non-registered firm.

    Thank you again
  5. if they require you to register with the SEC and take a licensing exam (series 56 or series 7), they are registered. If they don't require registration, they aren't registered. This does not mean the firm is operating illegally, especially if they are located overseas, just that there is more oversight over the procedures
  6. You can call the CBOE if it's a CBSX firm and they will tell you when the firm got registered. Also, there is a link on the CBOE site where you can look for any disciplinary actions. The same goes for FINRA firms, there is a link called "broker check."

    As far as protection, any firm can close shop, however the registered firms have owners and compliance officers who are licensed and must follow many rules set by their SRO (self regulatory organization). This means they are less likely to abscond with your capital than an unregistered firm. The penalties for a registered firm for violating SEC rules can range from a mere fine all the way to being expelled from the securities industry. Of course, criminal actions can be forwarded to the DOJ.

    There are far less protections with unregistered firms. I have friends who got burned by an unregistered firm and are still trying to receive their funds (some as much as 40k). As Evo wrote, a firm that operates overseas may not be registered domestically (within the U.S.), and that doesn't imply that it's a scam.

    As Don mentioned, you want to check a registered firm's financials. You can ask the firm itself, or go to the site, and under the search just type the name of the firm. Each registered firm must file annual "focus reports" around March, where you can get the .pdf file of their balance sheet.

    Do not make the mistake that many have made in the past, take the exam, get licensed, and stick with registered firms.

    Even though it's going to cost you more in fees, the headaches of trying to go after unscrupulous operators is far more draining than getting licensed and doing business with a registered firm.
  7. prop trading is for stock traders who don't have enough money to trade their own account. Most small traders trade futures or forex where they don't need a prop firm to back them.
  8. Shanb


    Well prop firms will give you access to Leverage, commissions, and software that you are just not going to have access to in the retail world. If you are trading intraday this is especially important.

    Think about it if you are executing a very commission intensive intraday trading approach that requires some top notch software to execute. Your not going to settle for IB and their software and rates.
  9. I agree, Like I said, prop is for stock trading. If you trade futures or forex you don't need them.
  10. If you have to even be told that at this point, give up now.
    #10     Mar 28, 2012