I was speaking to a friend today and we were talking about the expectations that traders have regarding commissions, payouts, and just general entitlements. The traders that I refer to are of the so-called 'independent traders', 'day-traders' or whatever other term you would like to use catagory. Basically referring to traders that either trade prop. with someone else's money, trade with a deposit or trade fully backed with their own money. I have to say that this subject really irks me and I feel that things will be changing very soon and changing dramatically. When I say that it irks me, I mean that these traders that I am referring to are simply whacked out of their mind as far as their expectations are concerned. Frankly, I have no agenda with this post whatsoever other than to voice my controversial opinion, get bashed a bit and see if anyone agrees with me. I am confident in my opinions and believe in what I am saying. Things will change and they will change dramatically. Anyway, let me get to the point. Seems to me that traders are now expecting (and in fact demanding) sub- .5c per share commission rates, 80-100% payouts (depending upon their capital contributions), office space, systems, support services (processing, accounting, etc.), substantial leverage, and even training. In return, they are willing to offer their hard-work (of course on their time and schedule because they essentially view themselves as independent contractors- ie. unlimited vacation, etc.). What irks me the most is when these traders expect the firms to back their losses and give them a very handsome (50%+ payout). For what? Their hard work and "skill"? Truth is, most traders are losers! Simply put, there is a very small minority of truly skilled traders with a legitimate edge. What gives these traders their cojones? I mean does one actually think that a firm is going to risk capital, take 100% of the losses (or even 50% of the losses), cut commissions to the absolute bear minimum just so they can be graced with your wonderful 'skill-set' which in most cases has been honed if at all, within the last 3-5 years? Get real! George Soros only asks for 20% of his trading profits! Stevie Cohen (after proving himself for multiple decades delivering substantial returns) had the audacity to ask for 50% of the profits. What makes a trader now think that he's got a big whopping 5k and he should be entitled to leverage and a 100% payout with sub .5c commissions? Let me tell you, for decades, traders/investors paid $300-500+ to make a 1,000 share trade through retail brokers. When I started in the business over a decade ago, institutional commissions were 6c per share. You had a better chance of hitting the lottery than becoming a trader. You had to have a Harvard MBA, plus have a family member in the business. Even then, you had to work as an assistant for 5+ years to just get your own book! Nowadays, every person with a dollar and a dream thinks they are a trader and have all kinds of entitlments. By the way, nothing negative has precipitated this email, I am not mad in any way, I just felt compelled to air my feelings, albeit controversial and wait for some fireworks. Anyway, let me tell you something, what we are witnessing now is a left over by-product of the late 90s when you could put a monkey in a chair and he could make money. That's why the Schonfelds, Worldco's, etc. of the world could afford such high payouts. Don't you see the writing on the wall? Firms backing traders are falling left and right. Why? Because unless you are riding the wave of the greatest bull market in history, trading is not an easy game for the 'unskilled' and no investor can survive by taking 100% of the losses and paying out over 50% of the gains. It's absurd to expect that. The mid-late 90s were the most unusual times in the history of the markets that may EVER be experienced. This time period will be spoken about 500 years from now. This makes the Tulip mania and the Gold bubble, Nikkei bubble, Oil price spike, etc. look like child's play. You could close your eyes buy something and collect an enormous check. Add in the IPOs and it was mind-boggling. Firms were salivating to put as many people in seats that they could cram in. Anyway, this is not reality. From the traders perspective, ride this gravy train as long as you can. It will be ending soon. I can't blame you for doing that. As for the trading firms, grow some balls and stop responding to the pressure of ever increasing demands from traders who are having more difficulty making money and thus are trying to negotiate unfathomable deals. Don Bright, I applaud you. You seem to run a credible firm offering a more than attractive deal. I doubt you can keep it up. I don't think that you will need to. Anyway, my hand is tired. I just wanted to air some of my thoughts. My training and nature, I am an independent thinker (Global Macro trader) who tries to foresee the long-term future of certain situations. I welcome all responses, good, bad or ugly. No harm intended, no personal axe to grind, just a very honest and thought out observation of the current state of the 'semi-independent trading world'. Best. Neal.
It's a commodity business now. Take the computer industry for example. For those businesses to thrive in the future they will either have to raise prices, or some firms will have to drop out and let the others take the volume. The prices aren't going to go up...
Ain't it amazin' how technology changes one's view? Just a few short 100 years ago, most folks were sitting in the dark without electricity and now we "almost demand" it to work and feel entitled to it! Point is, things change- move on, adapt and get better! Just a few hundred years ago, no one practiced freedom of speech......
This changing climate has not come about because of a major sea change in technology. It is a residual product of the bull market in the late 90s. Traders still want to make a fraction of what they did in 99 (or even make anything for that matter) and Firms are also living in the past when losses were non-existent and money was in fact growing on trees. Thank you for your response, nonetheless...Neal.
Well the traders can ask and expect that because almost all the firms that want to stay in business have to cater to the traders that are left. Similar to say Walmart selling a DVD player. Ten years or so ago they were selling for $1000. A week ago they were having a special for Christmas selling one for $25. I am sure they would prefer everyone to pay $1000 but too much competition and there is always someone willing to be the low cost provider. Usually once the prices comes down they don't go back up. So basically if you don't want to give what the traders are wanting, currently there are 100 other firms willing too. I can't see this changing unless all the firms go out of business except for only a few where they can gain some pricing power again. Anyway just my opinion.
So what is your solution? Jack up the rates and change pay-outs to 50%? That would make it near impossible for traders to survive. Everyone is trying to get past the difficult times. You know, every industry goes through such periods.
I agree with you 100%. I just feel that the firm's that are continuing to try to compete with the lowest cost providers, will in fact go out of business eventually (if not soon). This is particularly true of firm's that are risking some of their own capital on their traders. Thanks for your opinion...
You hit the nail on the head. The industry is not in business to allow all traders to survive. Traders have no G-d given right to survive unless they are highly skilled. This is 'real trading', it's a tough battle, a war, only a few survive. I bet 9 out of 10 people on this board that are trading full-time will not be trading 2-3 years from now. Just my opinion. Not looking for a solution, just trying to enlighten people that they are still living in the fantasy world for the late 90s.
If you want my solution here it is...Firm's cannot committ any capital at all to back their traders losses. If they do committ capital to back their 'super-stars' a 20% payout to the trader (as in a hedge fund if you are an investor) is very reasonable. Most traders should not be backed at all. If you are not backed and you lose your capital contribution, you are done. With that, firm's that are providing a service such as offering leverage, office space, systems, support, training, etc. deserve a reasonable living either in the form of a fair share of the profits or significantly higher commission rates. Remember, this is not a non-for-profit business. Firms are not philanthropic institutions. What are substantially higher commission rates? I'm not sure, depends on their cost. I don't think 1c-2c per share is completely unreasonable. I think the 'wholesale rate' is probably about .1c per share. I don't see why a firm shouldn't be able to pocket 1-2c per share for providing these services to their 'customer'. A better model would be to take a decent percentage of the trading profits (ie. 25%+) rather than charge high commission rates as I suppose such high commission rates will not allow the trader to be profitable and hence they will lose their 'customer'. Just my opinion...
It also depends on where you are looking when you are considering prop firms. There are several firms in chicago offering prop futures where they take all the risk, provide a split from 30-80% and pay a salary on top of that. I would imagine if their model was not working they too would all be going out of business but instead they keep growing in size. WIth properly run equity firms that go after the low cost high volume model you would be surprised how much money they can make even at these low commission rates if they are self clearing. The also have revenue from ECN's and they used to have a lot of revenue from providing bullets. A lot of the firms that slashed the base commission rates made up for that by charging higher ECN rates then just straight pass thrus. Also who knows if these large firms get a volume rebate from the ecns above and beyond what is been posted on their websites. For a long time dealing a commission and pay package was like a car lease where there were several areas of revenue coming in for the firm.