what exactly is a prop firm?

Discussion in 'Prop Firms' started by farcry360, Jun 9, 2011.

  1. farcry360


    so from my own readings and contacting firms themselves, i have realized that there are broadly 2 types of prop firms

    those that allow ANYONE to get in given a capital contribution from the trader, and those that HIRE a select few

    i'm sure that firms that you need to be HIRED to get in will offer training and the trader himself will be supported somewhat

    but the firms that anyone is allowed in with a capital contribution is what im curious about

    so from my own research, it seems that they offer little to no training, and that the trader himself has to be profitable even before going in for him to "last" at the firm

    if the trader does not know trading beforehand, then what happens is the prop firm simply lets him go and loses little to no money since they already got money from the trader when he signed up

    so my question is, is this the extent of most of prop firms that require money going in?

    do you have to KNOW trading beforehand?

    they don't offer you any training other than introducing how to use their trading software?

    if anyone can pitch in, i would really appreciate it

    thx in advance
  2. look at bright's trading site. Don gives a good example of retail vs professional trading vs prop
  3. It's good that you are doing your own research. You are correct in noting the difference between the prop firms who hire traders vs. those that allow traders to join with a capital contribution.

    However, some prop firms offer training for a fee, whereas others simply take in capital contributions in exchange of allowing the trader to use firm capital, and as you point out, the trader must "KNOW" trading beforehand.

    At CBSX registered firms, the capital contribution is "locked up" for a year as per SEC Rule 13c1. You can read about the "lock up" requirement at the CBOE regulatory site or the SEC.gov site.

    In terms of your comment of a prop firm who "lets him go and loses little to no money", the trader can request the return of the balance of their capital upon expiration of the one year lock up (if there's any left). If you have experience at trading, then joining a prop is a great way to access firm capital, and lose only the amount you're putting up as risk.

    If you don't have experience, then you have a choice of paying for training at a prop that offers it, or by paying for training at an education-only firm.

    Or, as you mention, get hired by one of the "true props" that do not require capital up front and do not charge for training. These are very few in number (for equity props) and usually hire recent college grads only.

    Either way, the market is going to collect your dues, one way or another!
  4. this link seems to be the most accurate information - http://capitaltradersgroup.com/website/what-is-proprietary-trading/

    Online Trading Brokers

    (i.e. Scottrade, ETrade, Sogotrade, Interactive Brokers, etc.)

    Most newcomers to investment and trading stocks often cannot tell the difference between a proprietary trading firm and online broker trading. Traders make their comparison of brokers based on a cost analysis model on the products offered, but often do not realize that the products are not exactly the same.

    An online broker often has a flat rate transaction pricing structure that is inclusive of commission and the exchange fees. It is often around the range of $5 to $10 USD per trade. The trading platform offered is web-based and but often requires the trader to have the latest browser plug-ins such as JAVA, Active X or Silverlight already installed on his computer in order to run. The trading application may deliver streaming real-time last bid or ask, level 1 market data or delayed quotes, and in most case is offered for FREE to the trader.

    1. FREE Trading application inclusive of market data which may be provided by the BATS Exchange or Direct Edge, who offer free displayed books.
    2. Flat rate transaction fee.
    3. Historical stock data and more comprehensive research material on companies.
    4. Streaming news media content.
    5. Designed to work over the internet regardless of internet speed or computer requirement.

    1. Requires a computer to have the latest browser plug-ins and may only work on one or two browsers, such as Internet Explorer, and not supportive of other browsers such as Chrome, Safari, Mozilla, Firefox, Opera and Camino.
    2. Trader are offered few destinations to place orders and often miss trading opportunities that are visible in the books. The orders may well likely to be sold to the highest bidder such as to Market Markers with sophisticated black-boxes.
    3. Quality of support is low with long hold time.
    4. They charge additional fees for sub-penny stocks.
    5. Some online brokers charge for the platform if the trader does not execute certain minimum monthly or quaterly transactions.
    6. Some online brokers charge maintenance, inactivity or service fees.
    7. Margin is restricted to 4-1 leverage intra-day and 2-1 overnight for marginable securities.
    8. Traders who trade at the online broker are disadvantaged. Executions are often slower since they are dependent on the internet and the trader’s browser speed to send information to the market. I often refer to these orders as the “blind flow” because of the blind-sight and handicapped disadvantage that the retail trader has trading on the online broker’s system.

    Proprietary Trading Firms

    (Capital Traders Group, LLC)

    Proprietary direct access trading firms offer traders the ability to directly route orders to market markers, specialist such as NYSE floor brokers, dark pools, liquidity providers, other exchanges, and ECNs. The traders are given more advanced tools such as market scanners and the ability to see the full market depth. The platform offered will require the trader to install an application on his computer and run from the trader’s Program Files. The cost per trade is normally comparable with an online broker’s rate, but is often significantly cheaper on the commissions. For that reason, proprietary trading firms are very attractive to the more active and short-term investors such as day traders, high frequency traders, scalpers and momentum traders. These traders probably came from an online broker environment when they first started out in the industry, and once they developed a higher trading skill level and experience. They then upgraded to proprietary trading. These are seasoned investors who are fully aware of the pitfalls and rewards in trading stocks, options and futures contracts. They treat trading as a business and are often addicted to the highs and lows of the market. Let’s examine the proprietary trading firm offers:

    1. They offer multiple choice of direct access routing capability. The best firms will have routing to every venue.
    2. The ability to apply complex strategies and build algorithms. The exchanges do have strategies that are geared to assist traders in having better fills ratio and sometimes lower routing cost. For example, NASDAQ offers the SOLV strategy allows clients to take advantage of removing from the BX and getting a .0014 rebate on that flow. SOLV also only routes at .0026 and removes from NASDAQ book at .0027.
    3. They provide access to liquidity providers and dark pools that also offer the client a better price execution, fill ratio and rebate for adding liquidity. For example Citi’s LAVA will rebate subscribers 0.002 for hidden orders that add liquidity with zero display.
    4. The proprietary trading firm will pass on exchange rebates to their most active clients. The online broker most often route the flow to a low cost exclusive destination which does not cost extra and is not often directly to an exchange. Clients who trade at the proprietary trading firm get the advantage of benefiting from the widely adopted the taker-maker model that most exchanges offer.
    5. The trading platform provides the ability to execute transactions at a faster rate. A really good platform will have direct connectivity to the exchange matching engine. Thus explaining the definition of direct access trading.
    6. Proprietary trading firms offer more competitive commission and transaction fees than the online broker. The cost per transaction can be as low as .0039 per share for stocks.
    7. Most trading platforms provide access to more in depth real-time market data such as NASDAQ’s Totalview, ARCA Book, NYSE OpenBook, BATS and Direct Edge Books. These are books which can assist the trader in making better trading decision on very active and heavily traded securities in real-time.
    8. They offer higher margin leverage than the standard 4-1. Some firms will offer portfolio margining leverage of 6.7-1 margin. And the proprietary trading firm will offer leverage around 10-1.
    9. They offer traders a choice of trading platforms. A shrewd broker will provide a choice of direct access platforms and an online system for the trader to trade on. The reality is that the active trader will jump around from broker to broker and it is an easy sale if the broker has the system he is already familiar with. Most traders attribute their trading success with the platform. The platform must have the tools they need to continue their strategy successfully.
    10. The level of Customer Service provided by the direct access proprietary trading firm is better than the online broker. Most online broker may or may not have a telephone number listed on their website and perhaps only provide messaging support. The proprietary trading firm will have telephone, online live chat and e-mail.

    1. There is a higher technology cost. There is a cost to receiving in-depth market exchange data and additional routing fees to the Exchanges. And therefore the platforms are not offered as FREE.
    2. The platforms are downloadable and are often designed to work on Windows based operating system. It requires high-speed internet and often lost in connection can result in a bad trade.
    3. All orders are self-directed or unsolicited and most do not offer managed portfolio management. The proprietary trading firm will not advise you on what to buy or when to sell.
    4. The risk factor is higher since the trader is dependent on the stability of the technology and the trader has only himself to blame when the trade is not favorable. The transactions are happening in milliseconds and there is always the risk of a “fat-finger” key trigger.

    It is obvious that trading at the proprietary trading firm provides an edge over the online broker. Traders get the advantage to better tools and are offered more values despite the few downsides and risk factor. But it is important to note that these firms are more geared to the more sophisticated investors. An individual trading as a professional will require special tools and is willing to buy the more robust equipment to ensure that his work is at a higher standard. He will spend his time testing and trading on different platforms to test speed, stability and functionality. He will do his research on which proprietary trading firm will offer him the lowest commission, the most rebates and the best technology. He is also the same type of investor who will invest the time and research in knowing which securities to invest in.

    But let’s not forget the kind of investor who would not be attracted to either the online or the proprietary trading firm. This investor is the traditionalist who invests in safe instruments, low risk and none of what I discussed above would be remotely appealing to him. He would be someone who is not really concern about the cost of the trade or the tools needed to place the trade. He is interested in having his portfolio managed by a seasoned professional who he relies on for recommendation in growing his portfolio. This individual would see the services of the retail broker most valuable since he would rely on his broker to spend the time researching companies and managing his portfolio. The charge for this premium service is higher commission than both the online and proprietary trading firm because the retail broker is taking the risk of advising his client of what to invest in. And believe it or not he may very well be using the very same tools that the proprietary trading firm offers to traders.

    Ask yourself what kind of trading model is right for you?
    Are you someone who is looking to dabble in a couple trades per month?
    Are you a Wall Street enthusiastic who jumps from firm to firm and always looking for better deals?
    Are you someone who plays it safe?