Who Should Join A Proprietary Trading Firm?

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There Advantages and disadvantages to trading with a Proprietary Trading Firm. Many independent traders cannot command the same low commissions received by exchange members and member firms. Trading on your own may also be isolating. At a firm, you have dedicated support teams handling equipment, software and hardware upgrades, and developing/acquiring new trading tools. That is beyond the budget of many independent traders.

It is natural, therefore, that many independent traders consider joining a trading firm. Having coordinated a training/hiring program for a New York based prop trading firms, I have some familiarity with the challenges and issues involved in making such a move. Here are a few items for your consideration:

1) For those who are unable to trade their own accounts, Many career opportunities for traders are still at large institutions, such as investment banks. These are often very well capitalized and able to invest in training and development of traders. The catch? These organizations like to hire graduates of finance and financial engineering programs. Quantitative and programming skills are in demand. If you’re looking to build a long-term career in the financial world, I’d strongly encourage you to consider an MBA program with a finance concentration or a Master’s program in financial engineering to provide yourself with the competencies and skill sets that are increasingly in demand. In such firms, you’ll be an employee with benefits and a salary.

2) Can you afford to start out by trading your own capital? If so, this opens several doors, which would unavailable for employees of large organizations. Proprietary Trading Firms provide you with high-tech office space, tech support, equipment, proprietary trading strategies and trading platforms and pass along economies of scale to you. These firms generally can command low commission rates and may or may not pass along some of their own commissions to you on top of monthly fees for passed on from proprietary software vendors. Note that in this structure, you are a customer of the firm, not an employee. That means no salary and, in all likelihood, no draw against future earnings. The upside is that you keep the lion’s share of your trading profits. Another upside is that you will be able to directly compete against large investment banks and hedge-funds for liquidity by having access to level 2 data such as time & sales, market view, and access to multiple execution routes including ARCA, INET, NSDQ, BATS, EDGA,  TRAC, SBSH, NITE, UBSS, which give the independent trader direct competition to institutional traders without dealing with the constraints of relying on an employer for your livelihood.

3) Do you need capital to get yourself started? Then you might be looking at a proprietary trading firm, in which you trade the firm’s capital. The firm provides you with all equipment, space, tech support, software, and platforms. At some of these firms, you may be charged a commission on top of monthly fees. The firm, because it takes a large portion of the risk, will require a capital contribution requirement, which will be leveraged to provide the firm capital promised (5,000 risk capital for a 50,000 account would be 10:1 intraday leverage)

You’ll be more competitive to join a bank or hedge fund if you have the education and internship placement experience. You’ll be more competitive to join a prop firm if you already have an independent track record of investment & trading success. The education departments at the major exchanges, such as the Chicago Mercantile Exchange and the Chicago Board of Trade, publish lists of member firms and often are aware of training programs and hiring among these. Googling “Master’s of Science in Financial Engineering” and looking into MBA programs with strong finance components (see who is publishing in the Journal of Finance!) will give you leads for training for institutional positions.

The bottom line is that few organizations will take you off the street and put capital into your hands to trade. If you’re not an experienced trader with your own capital, my advice is to find a graduate program or a training program within a proprietary firm and learn the business from the ground up. Think about building a career, not just getting a job.

How do I find the right firm for me?

Here are a bunch of questions you should be asking:

1. Do you allow traders to trade remotely?

2. Do you require Series 56?

3. What are your commissions rates?

4. What’s your payout split?

5. Do you pass back exchange rebate fees?

6. Do you offer advanced order routing mechanisms? Do you have access to midpoint routes and dark pools? Please elaborate

7. Do you have special relationships with floor brokers (floor routes)? If so please describe the fee and rebate structure?

8. Do you have a capital contribution requirement? If not, please describe any risk management parameters (such as max drawdown per day) that you have.

9. Do you offer preliminary & on-going training and is it offered FREE?

10. Please elaborate on how much buying power you provide? If this depends on capital contribution, please elaborate on that too.

11. How do you process payouts to your traders?

12. What trading platforms are available to traders? Do you charge a platform fee?

13. Please describe any other fees that you require traders to pay?



“How Can I Join A Trading Firm?” TraderFeed. Web. 04 July 2011. <http://traderfeed.blogspot.com/2006/11/how-can-i-join-trading-firm.html>.

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