i suspect that most prop traders are "successfull" because the nature of their compensation structure is so skewed in their favor, and the banks which sponsor this are shockingly foolish... think about it - a prop trader bets with the bank's money, but his downside is no bonus whereas his upside is theoretically limitless... essential he owns a FREE put on his performance at breakeven! moreover, 99% of prop trader "strategies" amount to nothing more than some manifestation of a carry trade. There are endless such trades - buy junk bonds and collect the spread interest, sell way outta the money options and collect the gravy. buy mbs and retain the embedded option premium. this behavior is very rational for prop traders because the strategy collects good carry for several years and then blows them up (e.g. LTCM and insurance companies in florida). so they get paid well while the carry rakes in and then have a flat year....
"99% of prop trader "strategies" amount to nothing more than some manifestation of a carry trade". Does this mean that prop trading is basically rusting of the Ivy League brains. I would appreciate if someone could answer two questions a) what is the average returns the prop traders give to their instituitions b) what is their bonus like in terms of percentage of returns produced.
======= Interesting perspective. Also interesting that JPM exec expressed concern over the sustainability of perhaps what Wilburbear called a repeatable edge; ''interest only real estate loans''
Exactly right, in fact on most desks they piss away the profits made from ripping off customers on their own trading.
Good points all. The limiting factor in institution size trading is the mindset of these folks - they sit behind gleaming desks, make oodles of salary and have their egos massaged endlessly by brokers. Of course they think they're brilliant. And given all this, their senior managers portray them as market mavens who are beyond brilliant. Heres the reality- 1. Arb - Anyone can find a simple arb, push a gazillion dollars into it, or until it goes away, claim it as an arb, which gets treated very differently accounting-wise than outrights and suddenly your return on capital becomes infinite. Some arbs/swaps allow you to take the net profit immediately, meaning you dont accrue the earnings, you get to swallow it on Day 1 - neato accoutning trick. 2. Outrights - Seeing customer flows, order books etc, gives you an immense benefit the average joe doesnt have. Being able to swallow huge margin calls just means you have large capital/credit lines. It doesnt mean you're a good trader. 3. Swinging big lines, mean you can push markets into stops or chart points, something most traders simply cant do with their 20/30 lot trades. So, its not really genius trading, its simply a big upstairs desk trading like big locals used to. The P&L and reported numbers have limited meanings - its a function of accounting, not actual margin/cash flows. In the end, if these traders were all that, wouldnt their P&Ls be huge? Having for example a capital commitment of $10 Billion, means you squeeze $1MM out per basis point. Now, remember the futures multiplier here, so the amount squeezed out should be way greater. A normal trader with say, $1MM in capital cant make a living with 1 basis point trades. And the sweetest part of all this, is that these banks were originally meant to be financial internediaries, getting deposits and making loans - not dedicating, what is in fact, FDIC-insured money, to futures speculation.
in the end though, it's kind of an "if you can't beat 'em, join 'em..." that's why I want to become a prop trader
See first issue of Trader Monthly which rated traders....prop, individual, hedge, and institutional. One woman trading derivatives at a bank made 100 million for one year. She was paid 20 million. So, that's 20%.
i'm not aware of the 20mm dollar woman, but i do know that fixed income prop traders who work for banks and i banks generally get 10% to 14% for superstars with amazing track records this can go higher, but most are in that range. payouts for hedge fund traders can also be much higher
also, to address DONTS' point i understand the analogy (like the billionare japanese man who could just keep doulbling down on the rouletter wheel and put the casinboouy of biz), but i don't think that it is applicable. As i said earlier, all traders, both prop and market makers, have very specific drawdown limits for each day, month and year.... the enities driving the market (huge finanical inistiutuinons like fannie mae) are hedging, so as their trades go against them it is not an issue... moreover, fnma has more bond duration to shed oir buy than all the limits of the streets dealers put together
The question is how much average returns do these prop traders produce...........from the barclays CTA index we find that average for all the CTAs ranges from 8-12%. Do the Ivy Leagues have any different figures, given the fact that they have much powerful resources than average CTAs..............you can run a CTA shop with $1K monthly expenses, just to make a point.