Why Prop??

Discussion in 'Trading' started by Smikkey Trader, Dec 27, 2001.

  1. Im not exactly sure why the any trader would want to be a prop trader.

    Ive traded for a living for 4 years. I keep 100% of my profits, and have negotiated a commision schedule which I think I think is fair, and fits into my business plan. With the recent change in daytrading buying power to 4 to 1, I really cant understand why people search for a prop firm.

    Now, if a person has managed to scrimp and save a $5,000 stake (sorry for the sarcasm), and wants to be a trader, I can understand how these firms might recruit people, as $5,000 isnt enough to trade, without firm capital.

    My question is to traders who are consistently profitable, yet give a large percentage to some firm, and have capital of at least $30,000.

    Im not being sarcastic. Im sincerely curious. Possibly Im missing something, and should look into this opportunity. Ive been approached twice in the past, and both times, couldnt make the numbers work to my benefit. Possibly both of these offers werent very good, or maybe prop trading isnt for profitable traders, and works better for wanna be traders.

    Currently, my impression of a prop firm closely resembles a multilevel marketing company. A select few people recruit new traders, who they make an overriding commission on. In the vast majority of cases, the new "wannabe trader" loses thier capital to the market, and the pinnacle prop people make the commissions, and reload the recruits. If the trader is profitable, he provides commisions and profits to the people above, and recruits his own Amway salesman, errrr, traders.

    If you are in a prop firm, convince me of my ignorance. Im not meaning to offend, just looking for the proper perspective.

  2. Hitman


    ***My question is to traders who are consistently profitable, yet give a large percentage to some firm, and have capital of at least $30,000.***

    At Worldco, once you show some degree of profitability your payout will be well above 90%. Like any other broker, prop firms make money off commissions NOT net P&L.

    30K is not enough money to trade, at 4 to 1 margin it allows you to buy 2400 shares of a $50 stock. One bad streak and you are going to have to play at reduced size. Even for a newbie, chances are they will lose at least 5K of their money before they can turn it around, and unless they can come up with sufficient capital (hard to do when you don't have active income stream and got bills to pay), they are dead.

    Let's talk about someone who trades multiple 5000 share positions (no one can deny the fact that in order to make sized you will have to eventually trade size) every day. He probably has a 98% payout and pays 0.75 cent a share. He gets access to bullets. Now 5000x4 positions x $50 (stock price) is a million dollars, and you need 250K capital to do that. At our firm you need 25-30K and your money is NOT tied up. That is worth the 2% you give up in net P&L IMHO. (And if you really push it we do give 100% pay out to exceptional traders)

    ***A select few people recruit new traders, who they make an overriding commission on. In the vast majority of cases, the new "wannabe trader" loses thier capital to the market, and the pinnacle prop people make the commissions, and reload the recruits.

    At Worldco, little (because we want you to have a little bit of your own money on the line so you take the job seriously) to no capital is required, and if the traders are not making money, we are not making money.

    Keep in mind every newbie I recruit, I am taking direct risk if he blows up. Sure it doesn't hit my trading account, but it is completely possible that I spend a year or two running a team and ends up with nothing to show for it. There is no free lunch, and we don't expect to make money off newbies, how much commissions can we possibly make off someone trading 100 shares?

    And let's not forget the perks such as bullets, opportunity to team up with traders who may be better than you, etc . . . If you (or anyone else reading this thread for that matter) happen to be in New York area, trades listed, and can e-mail me a summary of your trading this year, the amount of capital you are willing to put up, I will make an offer you can't refuse.

    Then again, quite honestly, if you are making low six figures then it is probably very hard to convince you to make any changes. I mean, why fix something that is not broken? A prop firm benefits those who are starting out more than it benefits veterans.

    As a recruiter, I don't think it is ever possible to recruit someone on a hot streak (unless they are absolutely, positively, slaving away with a horrible contract), nobody want to make changes when they are bringing home big bucks, plain and simple.

    So no, if you are already doing great then the additional benefit of a prop firm may not be worth it, but let's just say for those starting out it is the best thing since sliced bread.
  3. As you can tell, Im very new to this site. I appreciate your input Hitman.

    The new trader with $30,000 who trades 2400 shares of anything is an idiot. Then again, from my limited knowledge, most prop firms limit the size thier new traders can trade to 100-300 shares. This is an excellent idea, and anyone with a shred of common sense will learn to generate profits on 100-300 shares, before jumping to 1000, whether they are at a prop firm, or in thier basement.

    A 90% payout is certainly higher than the offers I had. A payout in that area would make some sense. Ive heard you mention payout/commission. Im curious as to a commission range that your traders pay.

    I absolutely believe that the two greatest tools the successful trader has is experience to draw upon, and people to trade with, which can be shoulder to shoulder, IM, or in the least bulletin boards. A good trader needs to not operate in a vacuum.

    Anyway, thanks for the response Hitman, and continued success is my wish for you.
  4. Hitman


    The standard rate for a trader with 1 year's worth of experience at Worldco (and some capital in his account which he built with firm's capital when new) is 90+% payout and 1 cent a share. (If you come here with some capital and some sort of track record, I can probably start you off with something close to that)

    If he is an exceptional performer and/or generates exceptional volume, he can expect his commissions to be under a penny. If you average 100K roundtrip shares a day your commission will be cheaper than someone who does 50K, fair and square.
  5. Why Proprietary
    Well for someone new to the game, why not lose a firm's capital instead of your own?

    There are also professional firms, such as Bright, Liber and Weissman and my firm Echo that allow you to keep 100% of your profits/losses. They allow use of higher leverage/bullets that retail firms don't have. Higher leverage is best for placing orders heavily outside market, spreads/pairs, and scalping very high priced stocks.

    Bullets are best for shorting as no uptick is required. Professional firms are usually at the high end of the spectrum in equipment.

    As a retail trader? Can you place a buy/sell order at the exact same time?

    Can you hit the sell button without an uptick?
    Can you leverage your account 50X it's net worth on PAIRS/Spreads?

    There have been many debates on this board about the difference of the 3 kinds of firms. Professional , Proprietary and retail. Some are mixed.

    I know quite a few traders who trade retail and do very well. They usually though have over $500,000 in their accounts.

    I know quite a few traders at professional firms that have just $25,000-$100,000 in their accounts but they make returns that are 10 times what the retail traders make. They also put the majority of their networth in other areas to work for them.

    I wrote an article awhile back for DaytradersUSA about the differences of Professional firms vs the retail firms


    Check that out

    Also run searches on this site . Attn Admin-----This thread belongs in the professional firms section

    You may notice something. All of the professional traders once they have been at a professional firm will never go back to trading at a retail firm. But retail traders who wonder about professional/proprietary firms have never traded there
  6. Do all/most prop firms only trade in listed/NYSE securities?
  7. smikkey there is nothing wrong with a basement trading floor :) .

    i'm curious how many prop firms offer remote trading for experienced traders that may not have the on site option available. for some of us the life/family situation that allows us to pursue trading can also restrict our mobility.
  8. Hitman


    Yes, most prop/prof firms specialize in NYSE, if just because there is less risk involved. A lot of people will tell you NYSE is better than Nasdaq, I like NYSE better but I believe they are equal, but I have to give my vote to NYSE if you are new.

    As far as remote trading is concerned, would you let someone else trade your capital remotely when you can't watch over them, regardless of their experience? Flat out no. If you got family situations, play your own capital, very simple.
  9. cashonly

    cashonly Bright Trading, LLC


    There are many reasons people choose a Prop firm. One is starting with a small stake. If you're only putting up a few thou and the firm is taking the risk, then I think giving up a % is fair. But you don't sound like you're in that situation - $30,000, profitable, good rates.

    Another is that for someone like you, going to a prop firm would provide you with capital to multiply your profits. If you can make X dollars using your $30,000, then maybe you could make 2X dollars with a firm's capital. Based on your comment about the increase to 4:1 margins, it sounds like this could be a reasonable strategy. You would just want to pick a firm that doesn't take a % of your profits and offer you commissions and costs equal to or better than what you are getting now.

    Yet another reason is the types of orders you can get and strategies that can come out of it. With a retail account, you couldn't do the opening orders strategy. With a retail account, you couldn't put in orders that total more than your equity*4.

    Most prop firms will let you trade both listed and NASDAQ, so that shouldn't be an issue.

    I think you have a little bit distorted view here. As anyone that has ever hired people can tell you, it is a very time intensive process and you'd rather hire one person for a position and have them stay with you, rather than repeat that process 12 times a year. It's even more so that way in firms where the managers are also traders. Usually, they are good traders and the last thing good traders want to do is take time away from their trading to recruit people. They'd rather trade alongside the people that they have to help them become better traders.
  10. To make a living in this business, you need to be able to have access to capital far in excess of $30,000. Most successful traders use $500K - $2M intraday, and overnight (I know some don't, I am just using averages)...and with a Prop firm, you can get that money at no charge (intraday), and at a low cost (overnight).

    Market access is also better in nearly every case (especially for listed).

    We have had an ongoing discussion on this board about this topic, and these are the main reasons outlined for becoming a licensed (professional) trader.

    Another big reason (almost forgot) is the tax benefits afforded our traders (NO FICA or Self-Employment tax), and you get a single K-1 which saves you hours of accounting etc.

    I see that Hitman has answered from the WorldCo end, and I am always happy to answer any specific questions if you care to call. Happy New Year!!
    #10     Dec 27, 2001