As many of you know, the SEC is considering new rules to make what a lot of the current proprietary trading companies are doing illegal (taking deposits, paying out almost 100%, etc..), since they feel that it is really just a retail account disguised as proprietary trading. I agree with this, it really is a broker-customer relationship, not a firm-employee relationship. You are not trading firm capital, you are actually just trading firm leverage, since you are responsible for trading losses. Now, I think prop firms offer a valuable service to many traders, and I don't see any reason why it should be outlawed, BUT, there is a problem w/ the industry because many unscrupulous companies are falsely advertising it. Personally, I feel that any action taken by the SEC should be as follows: Proprietary trading shops cannot call themself proprietary trading, or advertise that they are "hiring" traders. They must advertise the service for what it is, a broker-customer type relationship (and perhaps have a new name for the type of trading) The prop shops must INFORM traders of what the risks are. Granted, currently the good ones do, but a lot of unethical ones make it seem like it's risk-free for newbie traders. They must CLEARLY tell traders that their "capital contribution" will be used to cover their trading losses and commissions. Any advertisements on job sites must clearly indicate the fact that there is no salary and there is a high degree of risk. (Currently a lot of these companies are putting up job postings just saying "competitive pay"). If the company requires a deposit from ANYBODY, they must clearly state this on the job posting. Deposits must be kept in a seperate bank account, the firm cannot combine it with it's own money, this way it will avoid the problem where traders may lose their deposits if a bad prop trading firm goes bankrupt. If the management does ANYTHING that could cause a loss of a trader's deposit, they will be criminally liable for fraud. Prop trading firms who require deposits must disclose financial statements just like a brokerage has to. There's no reason traders should have to be exposed to bad companies with poor financials that may cause interruptions with their trading or a loss of their deposit. The firm must give the trader an all-inclusive list of charges, fees, etc.. that clearly tells the trader what they will be paying, just like a brokerage would. They cannot charge for anything not on the list. I think the major problem now with prop shops is the deception caused by some of them to get inexperienced traders generating commissions. As in any industry, there's good companies and bad ones, but the bad ones in this industry are causing real harm to the people who are duped into thinking that they're accepting a typical job under a typical employer-employee setup. What are your opinions on this?
I agree with a good portion of the above. If a firm has to use trader's money vs. using it's own, for net capital requirements (of course we certainly don't need to), then they should be held under much more scrutiny. The amount of payout, whether it's 90% or 100%, is of little significance in my mind. The firms that have decided to simply "go away" have left many traders in a lurch, and we have been happy to take up the slack. Keeping a solid regulatory repution and track record pays off in the long run (not just Bright, but the others who have maintained high standards). All the best, Don
The payout isn't an issue here, because that's something negotiated between the firm and the client. The only major issue I see is the deception involved. The people who sign up w/ the prop firms have to know what they're getting into! that's all! Btw Don, what do you think will happen to prop firms if they do pass legislation saying that what the prop firms currently are doing is illegal and is not allowed? I doubt they would do that because it would screw over a ton of traders as well as the prop firms. I could see them tightening the laws on advertising the services truthfully though.
Prop Shops are about Dead. The model's now create "Capital Contribution" and do create "Broker/Clearning firm-client relationship. Once the legislation is passed, IB will absorb most of the fall out and the rest will get "bank" jobs or something of the sort. E
http://www.elitetrader.com/vb/showthread.php?s=&threadid=78005&highlight=green There was this thread about tthe issue but I thought Don and Mav concluded it was a false alarm?
Much ado about nothing. You are actually making an argument for the exact opposite of what you are saying here. Think about this for a second. Let's say we do away with prop firm as we now know them. As regulated members of professional exchanges. They won't go away, they will simply go to IB and the like and operate in the retail world with absolutely no regulatory scrutiny what so ever. Now they can really screw you and you will have absolutely no re-course. Why? Because they are not regulated!!!!! No licenses, no exchanges, no BD, just a shell LLC. Btw, they already exist in the retail space and are completely under the umbrella and are completely untouchable by the SEC or NASD. What you want I think is actually more regulation and more scrutiny which means the government has to actually keep them in the professional space and out of the retail space where it truly would be the wild west. So your whole argument actually contradicts this. So to sum up, the government will never get rid of prop firms as they exist now, they will only regulate them more and make the barriers to entry greater.
If you read my original post, I never said prop firms should be dealt away with, I said they should face more regulation, especially dealing w/ disclosure and honesty, and possibly be renamed (since it's not truely proprietary trading).
Rename them to what? Come on man, you obviously have some hostility here because you replied to an ad to some bad prop firm and now you want a pox placed on all the prop houses. If a trader does not have the fortitude to do some basic research on these firms and understand what his risk is, then no way does he have the stuff to be a successful trader. That's just how I see it. We can't have a nanny state here. At some point, the trader has to take some responsibility.