Starting Daytrading Firm in India or China - advice?

Discussion in 'Professional Trading' started by CutsThrough, Sep 25, 2006.

  1. I’m interested in hearing thoughts about how much money it would cost to open a daytrading firm in India or China (1 office initially) as well as the potential pitfalls involved in doing so.

    I’m going to be completely honest here as to my motivations and goals: I’m a failed daytrader. I was fortunate enough, however, for this to happen when I was young (still am – under 30). Aside from market microstructure, I learned a TON about the profitability of the prop business model and I truly believe that the active trader community would benefit from being served by one who formerly traded, who knows how hard it is, and who wants to provide solid business value to help increase their profitablility as professional traders.

    It seems to me that the reasons more people are not opening prop firms have mostly to do with the classic barriers to entry:

    1. <b>Cost.</b> Most people who are aware of the prop business model are failed daytraders. These types don’t have much money to put behind their ideas and probably don’t have very good credit either since they are most likely fish who have routinely overextended themselves throughout their lives. Again, I’m glad I learned young.

    2. <b>Information.</b> Like many great business ideas that have not become fully attenuated, prop firms are not very well understood by those who’ve not actively traded.

    3. <b>Will.</b> Most people are just pure lazy. There are at least a handfull of guys here who are not bound by 1 or 2, who trade successfully, but who simply lack the will to execute it. Hey, they don’t need the money. There’s no shame in that.

    Ok – so now that we’ve addressed some of the initial reasons why everyone and their mother isn’t opening a prop firm, I very much would like to know what some of the other challenges might be.

    To give you more detail, within 5 years, my goal is to open up a prop firm somewhere in either India or China (probably India) giving foreigners access to the US markets. I do not feel that I have a good enough understanding of market microstructure to try to trade foreign markets… not to mention that the necessary liquidity to ensure tight spreads is absent and would expose me (as the Class A share holder) as well as the other traders, to too much risk.

    I would provide all of the traditional infrastructure, but would mostly likely try to establish myself at the high-end right away by providing a high quality environment (nice/clean office, fast/new computers, central location) so as to be referenced as The Standard when other entrants arrive as well as to be able to effectively compete against existing firms (we’ve all seen the condition of many prop firm offices in the US – can you imagine what they are like in India/China if they exist?).

    I know that this post sounds sophomoric, but I’m in the stage now (and for the next year) where I’m simply trying to analyze the reasons why this cannot work and then try to refute them each in turn.

    Here are some problems that I’ve identified:

    1. <b>Time Zones.</b> When it is 930am in New York, it is:
    -- 7pm in India.
    -- 930pm in China.

    2. <b>Regulatory Issues.</b> What are the barriers for foreigners being able to trade the US markets? This might constitute a standalone barrier to entry if the costs are high enough to deter prospective traders.

    3. <b>Currency Conversion Issues.</b> Currency exposure could constitute a barrier to entry. Traders would have to be allowed to trade all listed US stocks, which means their accounts would have to be in USD, which means that they would be exposed to currency fluctuations on both legs of the the transactions (funding and withdrawing funds). Perhaps an analysis of the expected cost would add granularity. For example, would it be optimal to convert all account each day or would it be optimal to redeem them on some fixed (less frequent) time schedule? Should this just be left up to traders and justified as a cost to them as a trader?

    Please let me know your thoughts. Specificity is always appreciated. Also, if anyone can point me in the any direction of a book or regulatory bulletin regarding foreigners trading the US markets, that would be very much appreciated as well.

  2. LT701


    frankly, its hard for me to believe that it's easier to set up a business in india or china in a field you cannot perform yourself in the united states

    secondly, if it's possible to set up there, a firm that already has the infrastructure could beat you until you're tapped out

    thirdly, what makes you think you can bring on a culture of success in your trading pool, if you've failed to find it for yourself?
    just who is going to loan you the capital for your foreign recruits on your say-so?

    dont mean to be harsh, but seems like frying pan into the fire

    at least with personal trading, you can turn off the tube and walk away (assuming you didnt aquire a gambling problem) - you cant do that with a business
  3. First, fair points. My failure as a trader had mostly to do with my not being a good trader, not with my ability to do well in business. Since quitting trading, I've done quite well for myself, which is why I'm in a position to think about (in my late 20s) what I want to do with my life.

    Second, I haven't been able to find any data regarding competition and the market of daytrading firms there, but I can't imagine it being any more competitive that the US, which is still a decent market for the prop firm who provides solid business value to traders. Frankly, I've never felt that just because others aren't doing it means that they know something that you don't and therefore shouldn't even bother exploring it to be a valid argument.

    Third, owning a daytrading firm is not about finding a pool of talent - it's about providing a quality venue for people to trade. These people would be putting up thier own money and using my leverage. There would be no trading with firm capital.
  4. I already know of several groups of people who have opened and are opening offices all over India. So it is being done...
  5. Thanks Steve - can you point me to any info? Cheers.
  6. LT701


    'These people would be putting up thier own money and using my leverage. There would be no trading with firm capital'

    how is using your leverage not using your (the firm's)capital?
  7. Same way that it works in the US.

    Trader buys B Class shares, uses firm leverage. When equity dips below $X (a positive number), he's required to put up more or redeem what's left in his account.

    All of this hinges on proper risk management, which when done properly, works. Let's not get into the argument of risk management, it gets played out on this board ad infinitum.

    But, obviously yes, proper risk management is what it all hinges on.

    But, to answer your question - if a trader uses leverage and gets a stopped out before his equity goes negative, then no - he is not using firm CAPITAL. He is using firm LEVERAGE.

    This is the key to the entire prop firm model. Pretty simple stuff.
  8. LT701


    fair enough

    and i'm not trying to be combatative, but i know from an it background that it is extremely easy to underestimate the costs and risks doing business in india or china

    and i'll leave it at that
  9. Yup - that's sort of what I'm trying to understand a bit better as well as other issues so I can start investigating them. My intuition tells me India is easier than China if for no other reason than the purported underground element.
  10. First of all, this is not a PROP firm model but the evolved hybrid prop/retail model currently used by US firms. Before you even consider about opening an office in India or China, I suggest you do RESEARCH and figure out why equity prop firms over 5-10 years ended up requiring that a new trader had to put up money and stoped paying a draw. Why did Worldco in 2002 change their policy and made it a requirement that new traders had to put up money?

    Once you figure that out, you will see that your proposed business model will not stand up to the competition, not even close.

    It is quite simple, but a bit over your head. You have not done nearly enough research to do this. There are other locations across the world that are not only cheaper but also less risky with the right connections. In India, qualified labor that would be educated enough to learn trading US markets is already in demand by the outsourcing industry.
    #10     Sep 25, 2006