I'm not trying to pick on you, frankly, I have no problem with your response. However, I just read your last sentence about everyone trying to get through these difficult times. I really had to laugh and comment about that. These are easy to normal times! It doesn't get better than this. The anomoly was the late 90s. This is what trading is about. You really need skill to make money! To me, the statement you made opitimizes the attitude of traders living in a fantasy world. Trade global macro through 3rd Q of 1998 or own $/Yen when Tiger sells it down 15 big figures in one night. Those are difficult times. This is child's play.
You spoke in the beginning that your post also refers to traders who are backed by their own money. I will assume your saying traders who trade at home with their own money and leverage. I would fall into that category. Trade for myself, with my own money, barely have the need for margin. Trading 10 years. So commissions are low, technology is better than ever before. You are dreaming of a time that is not coming back. Commissions at .06 cents and barriers to entry such as lack of real time remote technology to facilitate traders. If the commission schedule went up triple from here I would still make money. Want to know why? I would swing trade as I do now...commission schedule really has no meaning when you have the ability to hold from 1-10 trading days 5 positions at a time of size, not have to go on margin. Have the edge to be able to do it and the experience to know how. The only thing your post really should be geared towards are those called prop traders, who don't have the capital and rely on the leverage of OPM to trade. Yes if firms that cant provide this because their commission structures are not able to support their business expenses fold, then these traders will fold. These traders will have to go seek full time employment in whatever they were going to do when they first got out of college. They would have to save from their paychecks, trade on the side and build money up while working. Thats what I did 10 years ago, with a Quotrek and commission structure 10 times what it is now. Now I know you couldn't have written this piece and been expected to come up with every scenario as to who was going to reply or not. However, you did say truly "independent traders" were included in your reasoning as well. I say that is just not the case for those who fall in my category. The only one taking "us" out of the game will be ourselves, if we get sloppy.
Those futures firms that you speak of in Chicago will be out of business. I have no doubt about it. This is a very favorable time for futures trading (ie. commodities trend-following as their are major trends due to the increased political/economic instability which allows for revolutionary price changes to occur). This is why they may be holding on for the time being. Let me ask a stupid question? If I am going to invest and risk 100% of my own capital, why wouldn't I want to invest with John Henry, Roy Neiderhoffer, Campbell & Co., Dunn Capital who are the absolute best futures traders in the world and only give them a 20% payout. Sounds ridiculous to have in-house traders that you are bankrolling and paying them out 50-80%. Unless they are charging $50 per round-turn in commission, I personally want to shake hands with the genius running that firm! (hint of sarcasm here!). Thanks for your reply nonetheless...
You are correct, you are an exception to this discussion. However, I would truly consider you just a simple customer rather than any sort of prop. type trader. As you said, I couldn't have thought of every type of trader in existence, especially at this late hour. All I can say is that as long as the firm that you clear and execute through makes a steady profit on you with no risk, your commissions are probably reasonable exactly where they are. There is no question that the cost of doing business for these firms have come down substantially, I just don't think that they can make money (or not lose money) at the current rates, particularly backing traders with any capital at all. Thanks for your reply...
Maybe they don't invest with those firms because they are recieving a far greater return on their money invested with their prop business. They make money on the split, on commissions, and some on seat fees. A lot of these futures firms are not just holding on for the time being. Many are doing well and expanding. Look at Refco who bought into one of these firms last year. Many are like any trading firm from "back in the day", it is just that everything is evolving to electronic rather then floor based. What a lot do is keep their losing traders at small lots or eventually cut them while distributing more capital to the more successful traders. It sounds like you favor the high cost model over the low cost high volume model. I guess though both firms end up meeting the same fate. The low cost provider can go so low as to not be profitable while the high cost provider prices himself out of the market and goes out of business for not having any business. Different strategies same fate. However in this business it seems the high cost model is the tougher sell because there is way too much competition and too many firms willing to step in and make less per unit in the hopes of gaining larger volumes of traders/transactions. Then again who knows in 5 yrs you might be right and all the prop firms will be out of business.
Firms supporting traders have been around since Jesse Livermores time and they will continue to be around. There are different motives for different players to support traders. Recent phenomenon is some hedge funds trying to get in to the business of supporting traders because they want to lower their own commission costs by building volume, to learn their strategies and also to get their contribution to the kitty so that they can show some investments have come in.
<<Nowadays, every person with a dollar and a dream thinks they are a trader and have all kinds of entitlments.>> I must chuckle to myself here as it is so true today .One sees that businesses don't consider employees as employees, but as associates. Everyone wants to be somebody..........but it is still old fashioned hard work, determination and persistancy that creates success. One must be still carefull who he/she is in business with(or works for) . Casey
my post was in reference to the comment " nowadays every person with a dollar and a dream thinks they are a trader and has all kinds of entitlements". for some reason the in parenthesis didn't come through on previous post
Regarding those who trade fully backed with their own money, I think you are flat out wrong, and I'd be willing to bet you $10 grand that commissions are lower in a decade than they are now. The long-term global trend is broker disintermediation, where the middle-man broker gets squeezed relentlessly on costs due to increased competition from global players and the increasingly commoditised nature of his business. The better-capitalised and better managed brokers will invest in technology and marketing to grow their customer base, using economies of scale to reduce the marginal cost of executing a trade to near zero. Once a firm like IB has signed up their most recent customer, how much additional $$$ does it cost to process their order above and beyond their fixed overhead for running and maintaining their business? Almost nothing. Therefore the IB commission above and beyond exchange fees & other expenses will tend towards just a fraction above almost nothing. IMO you are misunderstanding the economics of the brokerage business. "Capital Market Revolution" came out years ago and you're predicting a *rising* trend in broker profits & commissions? IMO the globalisation of market access through internet technology will result in ever more consolidation and price discounting, like other commodity businesses such as PCs, televisions, call centres etc. Eventually some firm in China paying its brokers $0.50 per hour will be offering 5 cents commission per Emini contract. Even the exchanges, thought of as natural monopolies, are facing competition - how long till Eurex forces the CME and CBOT to slash their ludicrously overpriced rates or go bust? I totally agree with you regarding the prop trading setup, but on general broker commissions for fully-funded traders, the long-run trend is totally against your position. Look at IB - once the market leader on retail rates, but now other competitors are matching or beating its commissions only a year or two later. Competition will force brokers to reduce their cost base and therefore the rates they charge customers. There is a clear arb between institutional rates and retail rates, thanks to technology, and technology will lower the costs of that arb over time, thus lowering retail rates ever closer to institutional levels. A 10,000 lot will cost the virtually the same to process, regardless of whether it is a single huge order from some hedge fund or a bunch of 1 lots from 10,000 retail suckers. Finally, I don't understand your argument that the fall in the number of traders and their earnings will *increase* commissions. A fall in traders & trader earnings will massively reduce the demand for trading. What happens to price when there is a huge fall in demand? You're telling me it will go up? I'd love to know what market you trade that rises on falling demand!
Ok I get it - you think the "last men standing" will be able to jack up rates then? Not true - look at almost any oligopoly business e.g. automobiles. Massive economies of scale, only a few well capitalised players, yet they can barely make a dime. There are always potential new entrants, and more importantly the competition between the big few ensures that there are constant price pressures if not outright price wars. Or look at fast food - a few big players, and ever cheaper prices and cut-throat competition between the survivors. Dell has crucified the competition in PCs - are PCs now more or less expensive than a few years ago? Or even a few months ago? Economies of scale drive *decreasing* costs, not price increases. By your logic, McDonalds, Dell, GM, Wal-Mart etc should have significant ability to raise prices. Instead they are on a constant price-cutting drive.