Prop Trading Overview

By -

Sent in by a thoughtful Sloper who wanted to share….

In the process of hunting for a job I've delved deeply into the prop 
trading industry.  There's very little info on many firms since most have no 
customers, clients, or investors.  Some don't even have a website.  I've 
spoken with traders at probably three dozen firms at this point and now have 
a decent sense of the industry. 

   Here's a summary of the industry as I see it: 

Capital Providers (don't require you to put up your own capital and take 
minimal fees out of your trading revenues):

Options market making firms – usually headquartered in Chicago, these firms 
are technology intensive and generally built around small teams.  Traders 
are sometimes paid a generous salary with discretionary bonus, or sometimes on commission.  An 
example is Peak6. 

Quant firms – filled with engineers and PhDs, the firms are usually composed 
of large teams.  There is usually no sharp divide between quantitative 
analysts and traders, rather the "traders" are really statisticians and 
programmers.  Pay is generally a generous salary with a bonus tied to 
performance.  An example is Tower Research Capital. 

Discretionary firms – composed of former prop traders from broker/dealers, 
these firms generally support lone wolfs and tiny teams.  Pay is entirely 
performance based, usually 30%-60% of profits.  An example is Ronin 
Capital. 

Put up your own capital:  (easy to spot because they roll out the red 
carpet) 

Training firms:  These shops train new traders (frequently for a fee), 
require you to put up your own capital and provide leverage, and generally 
charge higher commissions.  Most emphasize technical analysis.  Example: SMB 
Capital 

Trading space: There are a plethora of firms that basically provide you with 
leverage, desk space, camaraderie, and everything that comes with back 
office support (see below).  You generally keep 70-90% of your profits. 
 Some support remote trading.  Example G-2 Trading. 

Backoffice Support:  These firms are basically providing access to a 
broker/dealer including leverage, a negotiated commission structure, 
clearing etc.  You keep 90%-100% of your profits.  Most support remote 
trading.  Example: Victor Securities 

The training firms are basically a sucker's game.  For the experienced 
trader with their own capital, the trading space and backoffice support 
categories can potentially be the best option, although, most of the best 
traders flock to the "capital providers" categories.