Trading Arcade business model

Discussion in 'Professional Trading' started by hmuz1234, Oct 2, 2011.

  1. hmuz1234


    I am an at home futures day trader with a decent track record, making consistent profits with limited drawdown and a solid risk management strategy. I have a relatively small trading account of USD 40,000 and I am looking to move my trading to the next level by accessing firm's capital while remotely trading from home.

    I am trading ZN exclusively (CBOT 10-yr US Treasury) and I am allocating USD 11,700 of capital per lot as this is what I am comfortable with in terms of money management. I currently trade 3 lots per clip (in line with my trading account size and risk management strategy).

    I am joining this forum to learn more about the trading arcade business model before I approach these firms. I have very limited knowledge of their business model, how they operate, and most importantly how they calculate trade size in lots per clip in relation to capital. Although the business model of each firm may be a bit different from one firm to another, hopefully I am guessing they woud operate according to similar rules and patterns and maybe you can help me to understand how these firms calculate the size per clip in relation to capital.

    From what I read on internet, there are 2 types of firms: proprietary and arcade. From what I understand both types of firms charge desk fees (if you do not trade remote), market data fees, trading platform fees, commissions, news provider fees etc and their are likely to mark up these fees when they pass the cost onto the trader to make a profit on them (although I read some firms do not mark up their costs).

    I understand prop firm provide full capital back up and take a fair share of the traders profits while trading arcades either partially back up the trader or do not back at all, hence they either take a small share of the traders profit or no share at all if the trader is using 100% his own money.

    I understand prop firms will make the trader start very small:1-2 lots per clip (unless you already trade large size at another firm for example) because they are very risk averse due to the fact 100% of their capital is at risk. They are also likely to show you the door if you have a few bad weeks in a row.

    In contrast, I understand trading arcades can make the trader start with bigger size, the size being related to the amount of capital the trader will bring on the table in case of a partial capital back up. I also read trading arcades won't show you the door straight away if you lose small / break even / make very small profits because they still make profit on the fees if they mark them up and the trader's capital is there to cushion small losses.

    If the above is true (if you may confirm) I would be more likely to take the trading arcade route with partial capital back up.

    I want to be clear, I am not approaching trading arcades to get more leverage (ie more risk), futures offer plenty of leverage and my retail broker provides USD 500 daily margin per ZN lot, I could very well clip 30 lots with my current trading account of USD 40,000 using very high leverage and abviously my account would blow up very quickly due to inappropriate risk management / leverage.

    I would approach trading arcades to get more $ in the trading account (not more leverage) as I want to keep the capital allocated per lot the same : USD 11,700 per lot. I read somewhere traders can start at trading arcades by putting down only USD 5,000 on the table and I find this amount ridiculously low , hence I am not sure I understand the trading arcade business model. I don't understand how one can hope to trade for a living by putting down only USD 5,000 as it's not even enough to trade 1 lot for my risk management requirements. Even if the firm adds say 5 times this amount (I am not sure 5 times is the right multiplier, its just an example and will lead to my next question) that's only USD 30,000 in the account ( 5000 from trader + 25000 from firm), it's probably just enough to trade a couple lots and definitely not enough to make a living. I visited a prop firm years ago and 50 lots per clip was the standard size, 20 lots per clip for junior traders, 100+ lots per clip for senior traders and 300+ clips for exceptional traders. When you think 50 lots per clip if the standard size to make a good living from trading, I can't see how a USD 5,000 deposit at a trading arcade will help at all unless I don't understand the trading arcade business model at all (that is very possible, hence I am here to learn more about s standard model common to most firms).

    I am guessing the figure will change from firm to firm but as a rule of thumb, can you please tell me the "standard" amount of capital a trader needs to put down per lot?

    In my case if I want USD 11,700 of capital allocated per lot and if the firm provides say 80% of the capital (I may get the 80% figure very wrong, let me know), I guess I need to put down USD 2,340 per lot and the firm puts down USD 9,360 per lot.
    Hence if I want to trade 20 lots per clip as a "junior" trader, I need to put down 20 * USD 2,340 = USD 46,800 and the firm will put down 20 * USD 187,200.

    Are these figures realistic, do arcades firms calculate size this way?
    At a standard Arcade firm using a standard business model, how much capital shall I expect to put down to trades ZN 20 lots per clip?

    I am sure it depends from firm to firm but at least if you could tell me an approximate figure, that would be very helpful.

    Also if the firm agrees to put down USD 9,360 per lot, can I verify the amount they put down in the account? I want to make sure the firm is putting enough capital on the table to ensure the account will not blow in case they frauded and used very high leverage without letting me know.
  2. If you are good rent a seat at the exchange and make millions.
  3. hmuz1234


    I believe renting a seat is useful to get the exchange fees down, i.e. you pay less per round turn. It is definitely worth it if you are an agressive scalper doing tons of RT/day with decent size.

    With my trading style, I take only 1-3 trades a day, averaging around 2 trades per day, so commission is not an issue.
    My issue is lack of capital to trade big zize.
  4. Maverick74


    Hmuz, I think you are confusing "arcades" in London with equity prop firms in the US. Very different business models. What you are looking for doesn't really exist. In the US, there are two types of firms. There is a 3rd in the option space but I'll leave that out for now.

    Equity firms in the US are typically broker dealers who require traders to put up capital in return for more leverage and better execution software. These are primarily stock only firms.

    The second type are prop futures firms which are located primarily in Chicago. These are spread trading shops for the most part. You deposit no capital but are hired by the firm and therefore they are very competitive and prefer guys right out of college. Most of these kids work the overnight shifts for two years watching the books of other traders.

    The firm you are looking for does not exist in the US but there are some in London. And none of them will let you trade remote. The reason why they don't exist here is the NFA forbids commingling of clients and partner assets in the futures business. It just can't be done. There is no such restriction in Europe.

    Hope this helps.
  5. hmuz1234


    I believe renting a seat is useful to get the exchange fees down, i.e. you pay less per round turn. It is definitely worth it if you are an agressive scalper doing tons of RT/day with decent size.

    With my trading style, I take only 1-3 trades a day, averaging around 2 trades per day, so commission is not an issue.
    My issue is lack of capital to trade big zize.
  6. You and maverick are small. Don't worry for a while,
  7. Maverick74


  8. Shanb


    I think the paper trading champ is confusing you for another person LOLL
  9. oraclewizard77

    oraclewizard77 Moderator

    I will assume you are in the United States. I think your best option would be to form LLP with some other futures traders.

    I will give you an example. I was watching TV on how some professional poker players created a partnership to reduce variance. So for example, they would all play poker each day where in a single day they could make anywhere from $ 20,000 - $ 80,000. They would subtract the losses from the wins for the group and split the profits.

    Another way was in Mike's book where he stated certain professionals would bankroll some players for the main events. For example, Mike who has won many bracelets was able to collect 1/3 of the winnings from another player who won the main event since he helped to bank roll him.
  10. trelco


    Threads like this make me think uneducated people are educating uneducated people...
    #10     Oct 8, 2011