For anyone that has some interest in trading, investing or analyzing the markets is impossible the avoidance of targeted digital marketing advertising proprietary trading firms.
In this article, which is not a sponsored article thus is free from any sort of ambiguity, instead of comparing programs which at the end would lead to a sort of advertising, will be done some analysis of the industry itself focusing on some key aspects.
The beginning
Prop trading firms emerged at the beginning in the open outcry market, but accessibility was not easy: buy a seat or a membership on the exchange and compete with broker/dealers was a key barrier to entry, where only very organized and balance sheet robust traders or partnership could make the physical settings or risk the consequences to operate remotely by telephone, risk frontrunning and having to adapt to a strategy different than daytrading.
First wave
Internet and low latency trading infrastructure allowed the first wave of prop trading firms. Either very close to the exchange servers if operating on high frequency trading or operating from luxury offices in the most expensive areas where rich individuals were trading for themselves and training aspiring prop traders.
Talent pool was quite large, the dot.com crash and the 2007-2008 financial crisis created turmoil among financial executives and financial institutions as well. Smart student aspiring to a trading career when Investment banks and Hedge Funds were facing layoffs found a meritocratic and dynamic opportunity in prop firms. In London for example during 2008 for 5 trainee positions at a prop trading firm there were 500 candidates sitting for a 60 min multiple choice test with loud club music in a rented hotel hall.
Strategy diversification would lead to a constant search for both experienced talents and trainees, where the latter would pay in some cases for a course or apprentship . This aspect was quite controversial since it was considered for many as a sub-optimal career path compared with the most prestigious and paid internship in the capital market division of investment banking and hedge funds.
Prop trading firms gained respect year after year, and their workforce was considered by the Hedge Funds industry and Market Makers, given the more flexible structure compared to capital markets division of a Tier1 Investment Bank.
Without the need to open the firm to outside money , prop firms adopted trading strategies that would benefit their book size or find market inefficiencies that would be difficult to replicate in a large hedge fund.
Second wave: Online Prop Retail Firms
Covid19 pandemic consequences of changes in lifestyle created crisis and opportunities in the business world. The online business clearly had a boost and in the latest three years a huge number of Online Proprietary Trading Firms emerged.
However some clarification is needed to avoid misleading reasoning. The fact that a business model uses the same name of another business model does not mean that the two businesses are substitutes. They are simply different. Here we explained the reasons.
How much in % and in salary earn successful traders?
Investment banks, which pay generous salaries and bonuses, do not pay more than 4 to 5% of book profit to profitable traders. Yes, that s not a typo error. If a good trader makes for the bank in prop trading $ 100M , and they do exists , they take home a 3 to 4 M yearly bonus.
These are very high skilled professional with a proven track record, and of course if looking for better alternatives that shares higher percentage there are Hedge funds, Family Offices (on the rise) , Emerging Markets Sovereign Funds, Market Makers heavyweights and Proprietary Trading Houses (funded by a pool of Ultra High Net Worth Individuals).
But in the hedge fund industry , where they compete to get the best talent even with upfront bonuses the Fund cannot charge more than 25% of gains to clients, in some circumstances 30%, or it will be out of the market. Clearly a superstar trader does not take home 25% of the performance since there are also analysts , researchers , risk management to get paid. On the top of this the hedge fund founder sees the Fund as an enterprises and wants a relevant slice of the cake as well, considering that in many cases his/her name is also associated with the capital management firm thus they risk a reputational risk that deserves to be rewarded.
In the case of prop trading house, the investors are not external but the funding partners. And even in this case all the trade offs and opportunities are evaluated before setting up an institutional prop trading house, where they have some operational advantage compared Hedge Funds but they have some fixed costs as well.
Prop Houses have control of the assets, making it more similar to a SMA (single managed account) than to a Fund structure, reducing opacity and redemptions call time and structures typical of hedge funds. Here talents must be paid very well but of percentage of the profit needs a reality check to keep the business interesting. They would pay more than Hedge Funds to attract trading stars ( considering also high watermarks, that are in place to avoid to pay twice the same performance fee while Equity did not have a new high) but there is a limit.
Why a Prop shop would pay more than 35%?
Trading is a risky venture and prop shop owners/partners must retain the majority of the performance. If they make 20% ( thus giving 80% to the traders as a payout ) in case things go well, but they lose 100% if results is disappointing shielding in full the traders for any downside, things are against basic principle of investing and finance, where money should go into the more rewarding ventures per any unit of risk taken.
Gamification and muddy the waters
This new wave of Proprietary Trading firms, introduced “challenges” and time horizons that are a pure non sense in the serious arena of capital markets.
Track Record of a trader is built with consistency during cycles and market ups and downs. Thinking to receive large sums of money to manage with payout above the financial industry rate after a month or three months is a pure illusion or delusional thinking.
These new “Prop Firms” are clearly providing some sort of entertainment to wannabe traders but the reality is different. As long that someone pays 100$ for a challenge and is aware that possibilities of success are close to zero, is like buying a ticket for a poker tournament, from a gaming perspective.
Online Prop Firms in some cases are deceiving intellectually poor financial educated people, while in certain specific cases that emerged were breaching multiple securities regulations acting as a market makers against the real money co invested by the aspiring trader.
These companies that borrowed the name from the original Prop trading firms are similar to gaming venues, where in some circumstances exists some good education material, but does not worth the price since the majority of the information provided is widely available for free.
The reality check is that hard work does not always pays off , it has to be channeled in the right direction: smart work pays off.
The first part concludes with a question.
Would you pay someone the majority of your enterprise profits while keeping all the risks associated in owning an enterprise?
