I'm a newbie/college student trying to learn more. I've been reading the boards for a few weeks and it's clear there are a lot of knowledgeable and helpful people out there I thought I'd drop a quick question: If prop firms let you trade with their money, and the commissions are presumably paid out of your allocation of their capital, I have two questions: 1. My father went to business school and is now an indoctrinated EFM theorist. Assuming the markets are efficient, and there is no way to make arbitrage profits or analyze info and become more knowledgeable than the market as a whole, how can pro firms make any money? Is the simple fact that pro firms allow traders to trade with their capital, that they bet money against the EFM theory every day by their very existence, a testament against the EFM theory? 2. If it is not their own capital they are risking, is it possible for traders to take huge risks knowing that they could make a lot of money at best and at worst just loose their job. Can traders be personally liable for losses? Put another way: if you plan to quit, what stops you from taking huge risks knowing at worst you'll just leave which is what you wanted to do in the first place? I'd appreciate any input. Thanks, Alex
"Assuming the markets are efficient" There's your first mistake. "...there is no way to make arbitrage profits" There's your second mistake. Seriously, if the EFM were true there would be no such thing as a long term successful trader. Trading firms make their money off the commissions the traders pay. Some traders are successful and stick around for a long time, paying 100's of thousands in commissions. Others bleed their account to death or blow up, but along the way they still pay commissions. "if you plan to quit, what stops you from taking huge risks knowing at worst you'll just leave which is what you wanted to do in the first place?" The firm's risk control department, which monitors everyone's positions and limits how much buying power they are given. But if they let you run up a deficit and then you leave, there's usually not much they can do about it.
so the traders pay out of pocket (from personal funds) for commissions? So a trader would need to save up money before he can trade at a prop shop?
Prop firms make money on the spread between the commissions they charge you and the commissions they are charged by their clearing firm. So even if your losing money, they can still profit. If you lose too much, they will lose on you.
If you can come up with $5K then you can get access to $75-200K buying power at a prop shop, depending on your level of experience. If you're not profitable, trading losses and commissions will come out of your deposit until you are forced to replenish this money. The alternative is to cut your losses and leave the firm.
Most firms will let you use their capital once you deplete your initial contribuion, unless you're a total putz.