What is the point of a prop firm?

Discussion in 'Prop Firms' started by ericmoles, Jan 4, 2009.

  1. I don't understand prop firms. The only benefits I can see are:

    1 a structured office environment
    2 a group of like minded people sharing ideas (synergy)

    Do they really 'teach' you to trade? And, if you can already trade, why would you want to give a cut (with some firms it looks like a large cut) of your hard earned trading profits to someone else?

    Aren't there plenty of platforms that would allow you to trade much more cheaply with identical speed?

    Is this an attempt to get around the 25000 day trader rule?

    Do these firms cover your losses (I can't imagine in my right mind how or why they would), or is that covered by your 5000 deposit? Once the 5000 is gone is it 'game over'?

    Are these firms really interviewing you to become part of a team, or sizing up the amount of $$ you'll bring in for their company.

    Maybe I don't get it, but it seems like a bit of a sham to me. My personal opinion is that under capitalization is a big reason for failure amongst traders, and prop firms just seem to be feeding into the psychology of why so many lose.

    Does anyone offer an environment where you can rent office space, trade using the broker of your choice, and collaborate with like minded people?
  2. Some do, leverage, yes, no, mine does, no deposit, both, not sure.
  3. Retail leverage is 4:1 and prop can be 20:1, no?

    Some charge desk fees and per share, and don't take % of profits. Theres lots of different structures.

    If they're going to take the time and energy to teach you, I can see why they want a cut. They may be taking on a huge risk, and obviously want to be rewarded somehow.
  4. In a word, leverage.
  5. tradersboredom

    tradersboredom Guest

    The exchange would give deep discounts on commissions when the prop firms gives them large volume.

    with large volume they get have an advantage over individual traders on commissions etc

  6. I am a daytrader of index futures. For a time I traded the ER2, but I currently focus on the ES.

    I keep my base capital small, and sweep my profits home to me each month. Back in the 90's in one of his seminars, George Lane of stochastics fame said, "$5000 is all you ever should give to a broker. $5000 is all you need to make $1000, $3000, $5000 per day in the commodities markets. Leverage is a wonderful thing ... when your right!" And there the whole class laughed, albeit a bit nervously.

    I see nothing wrong with the idea of providing a $5000 risk deposit or even a $5000 "training fee" for the opportunity to apply futures-like leverage to individual stock issues.

    I recall one of the interviews in Schwager's Market Wizards books a trader recounted how a college professor this trader had had told the class how futures traders trade with huge leverage, and while the class laughed at such folly, this nascent trader saw nothing wrong with immense leverage. Neither do I.

    I have always thought the PDT rule was anti-little guy. Anyone who reads Wyckoff's writings or Reminiscences knows that daytrading a small account offered the opportunity for a trading career that is now beyond many folks.

    I don't like overnight risk - but the PDT rule basically tells me that unless I entrust 25k to a broker, then I must either accept overnight risk or not trade in stocks at all, save for three trades/week!

    I have to admit that I am intrigued by the whole notion of prop firms. I did not understand what a "prop" firm was until I came across this forum a few weeks ago. I am intrigued by the notion of putting up 5K and swinging a 100k bat.

    As far as paying commish, fees, or even a profit split, I see nothing wrong with such an arrange ment if a firm were willing to set me up with such buying power.

    I am a bit perplexed about the series 7. I was a series 7, 3, 63 broker back in the 90's, and I can think of nothing I learned in the licensing materials that would aid in making someone a more or less successful trader. I imagine my series 7 is beyong my reach without a re-test, and frankly that is something I have little desire to suffer through a second time.

    Best Wishes,

  7. tradersboredom

    tradersboredom Guest

    the firms that ask you to deposit $5000 cause that is how much most people can afford to lose if they are new to daytrading. they are betting you will lose as a bucket shop too.

    you are better off trading ES in a SIPC US broker under your own name if you want to daytrade on your own account assuming you can daytrade, rather than deposit $5000 to a unknown firm located in the carribean bank account.

  8. r-in


    I'm sure I'll be corrected if I'm wrong, but the only way you are going to get SPIC is if the broker you trade futures with sweeps to an equity account like IB does. Most commodity brokers don't have that option. Losing $5000 because your futures broker went under is unlikely due to the way they are required to segregate accounts. More likely you lose your $5000 doubling down on a losing trade and the brokers risk controls kick in and dump your position before you put the broker under trying to buy the bottom of another 60-100 point down day on the ES. :D