Prop Shop FAQ

Discussion in 'Prop Firms' started by johngu, Mar 22, 2008.

  1. johngu

    johngu

    I'm pretty new to the world of prop shops, so please forgive the 101-type of question. Can someone enlighten me to the economics associated with top tier prop shops? I live in Chicago, and have heard that Jump Trading and Wolverine mentioned as being very good.

    Here's what I understand:

    The prop shop hires you, pays a basic salary, offers training, technical/IT and backoffice support.

    You trade using the firm's capital, with some amount of risk/capital allocation. You get to keep X% of your trading profits, minus perhaps some monthly fee to pay for the above stated services.

    Does this sound accurate? Now, the juicier questions:

    1. What are the ranges of X% that is paid out to the trader? I know this would vary depending on firm and the individual trader's demonstrated track record, but a range would be useful.

    2. What does the monthly fee (if any) range to pay for the IT/support services?

    3. How much risk capital is typically allocated to a trader? Again, I understand it varies depending on the firm/trader. Looking for a range.

    Does anyone know how much money firms like Jump Trading and Wolverine actually manage? I'm not talking about the BP, but rather the actual capital underlying that.

    I've heard stories of people making $1-$2M / year at Jump and Wolverine. Assuming a 50% payout, this would mean the traders made $2M-$4M. Assuming further a 20% ROI, this means that each person was given $10M to $20M of BP. So let's go with $10M. Shops like Jump and Wolverine has maybe 50-100 traders. That means $500M to $1B of BP. I'm not sure what this implied for actual risk capital. Not even sure if this analysis is accurate.

    Lastly, I'm just curious the types of strategies these firms employ. Obviously, the devil's in the details, and the details are what separates a good firm from a broke one. But in broad category strokes, I imagine the following:

    Index Arb: indexes and ETFs against component stocks
    Convertible Arb
    Merger Arb => although this is very risky these days
    Volatility Trading => options + dynamic hedging stratgies
    Electronic Market Making
    High Frequency Trading in Stocks and Futures
    Outright Short Term Directional Bets => relying on good trading instincts of traders, e.g. betting on short term mean reversion after a "too far too fast type of move", shorting commodities a few days ago would have been something that worked out well

    I'm not too familiar with bond based strategies. I suppose people can express yield curve bets by trading treasury futures (2yr, 10yr, 30yr).

    In terms of instruments that are traded:

    Stocks, etfs, stock options, stock futures, assorted futures (stock index, forex, energy, grains, etc.), options on futures, etc. Anything I'm missing?

    Many of the above strategies are trader / technology hybrids, requiring pretty extensive technology support. Some are even better fully automated (like high frequency). Any thoughts here? Do prop shops employ both human and automated trading engines?