Prop Firms & Trading

Every so often there is a question about the best trading firms in Chicago, New York or any other locale within or outside of the USA. I have been in this line of work for a while and I have learned some lessons hard way, because, frankly, I did not have anybody to ask about it, nor I had any contacts within the industry, prior to getting in. So, here are some of my pointers regarding prop firms, contracts and trading in general:

Prop trading firms:

Like any other form of business, they are there to make money. There are two ways for a prop-trading firm to make money:

1) Firm traders are God’s gift to trading and everybody in firm is filthy rich.
2) Firm charges extra commissions over the normal exchange fees and various forms of desk fees, that can be lumped into items such as: technology fees, clerical fees, phone fees, interest charges and so forth, and so on.

Considering that scenario 10 is highly unlikely, scenario 2) is the most likely way for a firm to make money. It may not sound that straight forward if you are new to this game, but as long as 95% of traders are breaking even every month, and the rest of them are making some money, everybody at the management level will be happy. So, if proper risk management techniques are being used, a likelihood of somebody taking a whole firm down should not be extremely high. Naturally, every once in a while somebody will bring everybody down, but 99% of the time that is due to somebody’s ability to circumvent risk management safeguards, or flat out ignorance about general risk attributes of trading strategies, LTCM, Bear Sterns and many others are there as witnesses to such arrogance.

So, when somebody new to t his business is considering what trading firm to choose, this is what I would recommend to look for and also to stay away from:

1) Firm should disclose their fee schedule before contract is being signed, so trader can evaluates its merits. If your expected trade profitability is a very large multiplier of desk fees, this may be not the best situation. So, if you are going to average $500 per day and desk fees are $3,000 that may not be too bad. However, if you are expected to make $100 per day, that $3,00 can be a “bridge too far”. Just for those who think that I am pulling numbers from my behind, just combination of TT or ECCO with CQG or possibly Bloomberg terminal, can be easily over $3,000 per month. This does not include a monthly draw or anything else. So, if they are not disclosing desk fees/commissions, or fees seem to be too high in line of what is possible trading strategy profitability, walk a way! You will not regret that decision.

2) Unless you have money, you will need to be paid some kind of draw on a monthly basis. This amount of money will be deducted from your profits once accounts get settled, If a draw is a recourse draw, which means that a firm has a right to go after it once when you leave with a debit account balance, walk a way. Do not get involved with such establishment!

3) It is reasonable to settle accounts on a quarterly or possibly semi-annual basis. Basic arithmetic can be summed to what did you make, and what did it cost for you to be there. Receiving a full cut of your profits would be nice, but if a firm keeps some part of your money until the end of calendar year and then pay you a lump sum “some” bonus, that is not bad or uncommon. You should receive interest on monies owned to you. Any “creative” stipulations on keeping your money for prolonged periods after you leave a firm are garbage, and you should walk away before getting involved with such mess.

4) If you have any questions about anything stated in a trading contract, go sit down with some employment attorney, and have him/her look it over. It will save you money in a long run.

Now, some more about trading. It is very hard for somebody who has no contacts in this industry to realistically gage what is most likely to happen when it comes to learning on how to make money. Just trading CNBCs Portfolio challenge or using trading simulator does not count as much in my book as gauging somebody’s trading potential. It merely shows interest in trading. Some people can trade their money, other can only trade somebody else’s money, and some cannot trade at all. It is hard to tell which one will you be until the real money starts being played.

The learning curve can be very expensive. In the old days, when pit trading was the only way to this work, if after 9-12 months a new trader is down his/hers seat leases and commissions, that was not too bad. It would take probably 12-18 months for a new trader to make money on a consistent basis. With advent of electronic trading, this time frame toward profitability can be probably shorten by a half. Naturally, this assumes that there are no other adverse factors in the marketplace. So, for all of you aspiring traders: it will take some times before you learn how to make money, but the bills will be there every month. You will have to be very realistic about your trading performance. Golden rule is: you cannot loose more then you can make. Even better: once when you have some money in your account, please do not risk more then 10% of its value on any trade. Trading does require a great deal of discipline and new traders will most likely not have it. That is why great majority of them will leave the industry.

There are many ways to trade. Some people are outright scalpers, other people are spreaders. Some people hold positions, other stay flat overnight. Regardless of what they do, or what strategy they use, they will have to somehow execute their trades. If you think that you are faster then a computer in canceling/modifying trades, you are lying to yourself. Just watch markets for a few minutes when things get busy and you will know what am I talking about. While a few years ago, I would suggest playing first person shooter games in order to practice clicking speed, with advancement of algorithmic trading strategies, click trading almost becomes useless as a skill. There are very few commodities that are moving slow enough to be successful by click trading as a general approach to scalping and spreading. Besides for guaranteed exchange traded futures calendars or leaving open orders at some pricing points, there is no way in the world that you will beat computers in their game. Algorithms can flip and modify markets before you know what happened.

This brings another point about prop firms: If their in-house software is not written to the exchange API, using commercially available software only, will put you at significant disadvantage. If a prop firm is not willing to invest in technology that will make their trades more profitable, do walk a way, before is too late!

 

Thanks for the post...very good info. Can you recommend any good prop firms in Chicago besides the big ones like drw, infinium, smw, etc...

 

Excellent post, badvlad.

 

You kind of got it in the nose. If you are looking for technology, DRW, Infinium, Allston, Jump Trading, Peak6,TradeLink and Ronin are hard to beat. Other places that are ok are GETCO, Harrison, GHCO and advantage Futures. You really have to look at see what may fit what are you trying to do.

 

I've been agressively submitting my resume to chicago prop houses for an assistant trader position and have heard absolutely nothing back. I'm somewhat surprised because last winter I applied to a few places that almost immediately scheduled an interview for me. Like an idiot, I spurned the interview offers and accepted a position at a large bank. After working in this position for several months, all I can think about is becoming a trader.

I'm just looking for some suggestions on getting noticed. Thanks.

 

You may want to talk again with guys that had called you up for the interviews

 

Yeah, it appears they are no longer as interested as they once were. Looks like I'm destined to be a banker (sigh).

 

Remember, there are no weekly guaranteed paychecks for a trader in a prop firm. Bills will be there…Banks do have trading departments. Talk to them, too.