Sunday, July 01, 2007

Steps Toward Joining a Proprietary Trading Firm

A reader and active trader recently emailed me, requesting my assistance in helping him land a position with a proprietary trading firm.

He didn't attempt to convince me that he had a passion for trading, that trading was his dream, that he was a hard worker, or anything of the sort.

Rather, he enclosed month after month's worth of account statements. He lifted the skirt and showed me his trading.

That, folks, is what winners do. I am only too happy to help such a trader.

There are many reasons you might be interested in joining a proprietary trading firm. Access to superior technology and support, reduced commissions available to traders at member firms, working in an environment in which you learn from others, and--of course--access to greater trading capital: all of these are reasons that bring traders to "prop" firms.

But what would interest a proprietary firm in you? Nothing speaks as loudly as your account statements and a summary of your P/L metrics (number of winning/losing trades; average size of winners/losers; breakdowns by long and short trades; etc.)

The trader who wrote to me has not been wildly profitable. But he has been consistent and--most important of all--he has demonstrated an ability to manage risk and the downside. If you can be profitable after commissions with consistency and if you can demonstrate sound risk management, you have taken important steps toward joining a prop firm.

The other step that is worth taking is demonstrating an ability to increase your trading size when you have been profitable over a period of time. This should be done gradually, but should illustrate your ability to handle larger levels of risk. Managers at proprietary firms will want to see evidence of your growth and development as a trader, and this is one way to demonstrate that.

In short, if you're potentially interested in joining a proprietary trading firm and trading the firm's capital, the best thing you can do is treat your current, personal trading as an audition for the firm. It doesn't matter if you're trading small; just document that you can trade well. If you do a good job of managing your own money, the firm will have greater confidence that you can successfully manage theirs. And I will be only too happy to help you find a good trading firm.

RELATED POST:

How Can I Join a Trading Firm?
.

42 comments:

David said...

I'm a value investor with about a 33% turnover rate, so I'm not much of a trader. I also can provide my statements for the last seven years, but I would assume that a proprietary trading firm would have no interest in someone like me even if my performance exceeded the S&P by 5%/year. Correct?

Trader Dan said...

I would be interested in your opinion regarding the length of time a track record of p.a. trading should be in order to be taken seriously by a prop firm. Thanks.

Brett Steenbarger, Ph.D. said...

Hi David,

Historically prop firms have favored shorter term trading strategies. Value investing--particularly if part of a long/short strategy that is not dependent on market direction--is more commonly seen among hedge funds and equity prop desks of banks.

Brett

Brett Steenbarger, Ph.D. said...

Hello Trader Dan,

Great question; thanks. A track record for a trader should be sufficient to cover a variety of market conditions. Personally, I'd want to see 6 months to a year at minimum for a relatively active trader. That would provide a decent sense of how the trader is managing risk, handling the upside and downside, etc.

Brett

Prospectus said...

As a slightly different angle on your theme, if a firm wants to sign you up sight unseen, that should be a bit of a red flag that the deal might not be in your best interests.

As Brett says: show that you know how to limit your downside risk and that you know how not to blow out an account. Trading small is fine for that. Go to Zecco or some such place and start trading small. Risk $10 per trade, and go from there.

Brett Steenbarger, Ph.D. said...

Hi Prospectus,

Great point. Some arcades make their money by charging hefty commissions and have no vested interest in a trader's success. They just try to keep the seats filled. Using your trading (simulated and real time) to audition for a quality firm is a great strategy.

Brett

jmcc405 said...

I am a position/swing trader. My average hold is about 12 days a trade. Do proprietary trading firms only use daytraders? I have no magic bullet for trading. I use technical indicators, some fundamental review and chart analysis.

Brett Steenbarger, Ph.D. said...

Hi JMCC,

Yes, prop firms generally emphasize short-term (intraday) trading, rather than longer swings such as you're mentioning--

Brett

bkveen said...

I'm interested in finding out more about how prop firm operate. How they function, what kinds of things they make profits off of. Do they only trade securities or do they also trade forex. I'm a very successful self trader. I trade forex and I want to start a trading firm. Basically rent office space hire and train some traders and go from there. I'm looking for basic information on how prop firms run.

Thanks,

Bryan

Brett Steenbarger, Ph.D. said...

Hi Bryan,

I don't have information specific to starting a prop firm, but I suspect such information is available through the futures exchanges (Merc, etc), since many prop firms are members.

Brett

Somesh Sharma said...

Hi
I am Somesh, working as a risk analyst with a proprietary trading firm. I need your suggestions to develop a sound risk managed trading environment.

tblfdc said...

Hello,

I've been contacted to go work to property trading firm. However, I don't have trading experience but the firm has a specific trading course which cost 7.000€. Can someone give an advice? Is it worthy?

Thanks for your help.

Brett Steenbarger, Ph.D. said...

Hi Tblfdc,

In my opinion, any such fees for training in a prop environment are a scam. I wouldn't touch such a firm. No credible prop firm that I've ever worked with has required such fees.

Brett

Brett Steenbarger, Ph.D. said...

Hi Somesh,

Great question, but beyond the scope of a blog Q&A. Short answer is that you have to manage firm-wide risk as well as position and daily risk per trader.

Brett

Josh J said...

Has anyone had any experience or have any knowledge of VCM? It's run by Oliver Velez who has quite a few books about trading and was an original member of Pristine.com.

amit said...

Dear Sir,
I am new to the world of trading. As you said "Using your trading (simulated and real time) to audition for a quality firm is a great strategy."
Can you please tell me a good site where I can where I can do Simulated trading? and some site where little investment is required, like 100 $?
I will appreciate your kind help.
Thanks a lot

Brett Steenbarger, Ph.D. said...

Hi Amit,

Many platforms allow simulated trading as a standard feature, such as Ninja Trader, e-Signal, TT, etc.

Brett

Brett Steenbarger, Ph.D. said...

Hi Amit,

Many platforms allow simulated trading as a standard feature, such as Ninja Trader, e-Signal, TT, etc.

Brett

Brett Steenbarger, Ph.D. said...

Hi Amit,

Many platforms allow simulated trading as a standard feature, such as Ninja Trader, e-Signal, TT, etc.

Brett

sheng said...

Hi Brett,

I am recently interviewing with a Prop trading firm, and I guess I pass the first round (some simple math questions) and they plan to fly me to their headquarter for the final round interview. Could you give some suggestion for the interview preparation?

Thanks a lot!

Kuman

Brett Steenbarger, Ph.D. said...

Hi Kuman,

Feel free to email me with specific questions; thanks--

Brett

hAnZahAr said...

Hi Brett,

you were saying: "Hi Amit,

Many platforms allow simulated trading as a standard feature, such as Ninja Trader, e-Signal, TT, etc.

Brett"

Yes I understand they allow simulated trading but any idea where to get data for ninjatrader?

would you recommend MBTrading?

Brett Steenbarger, Ph.D. said...

Hi,

I've never used MB Trading, so can't offer a view. You might be best off asking the folks at Ninja. I've found them to be helpful.

Brett

hAnZahAr said...

for equities I asked them they recommend bar-chart for 49 bucks a month...

I thought I can get free data somewhere like forex...

tibetexposed said...

Get ThinkOrSwim

you get delayed data, but all features of the platform are free and it's awesome for conditional orders and alerts, also gives you newsfeeds and access to CNBC with commercials cut out for.... free. When you're ready, put some cash in, but don't rush it.

Trader Kevin said...

"What would interest a proprietary firm in you? Nothing speaks as loudly as your account statements and a summary of your P/L metrics (number of winning/losing trades; average size of winners/losers; breakdowns by long and short trades; etc.)"

Thanks, Dr. Brett, great post.

I'm in the process of building a "new" track record I can show to people because my track record as a calendar spread floor trader isn't applicable for today's electronic trading realities.

Can you please flesh out "etc." in your list above? If you (or someone else) has a sample spreadsheet we could see (either as a screen capture or download) that would be awesome. Thanks in advance.

Brent said...

Thanks for your helpful advice on this site.

I am a forex trader with a live trading account showing consistent profitability of about 5% a month (rarely using leverage) and a relatively small max draw down of 6% so far in 2009. I also am about to graduate with a Masters in Finance if that means anything in this business and serious about trading for a legit prop firm. Are there still good opportunities available for traders who don't have computer science or statistics backgrounds in prop trading? Are the opportunities all for market making firms or is it still possible to be funded and earn a percentage of profits from firm capital? If so, do you know of any firms where this is possible? Thanks!!

Trader Kevin said...

Brent: "I am a forex trader with a live trading account showing consistent profitability of about 5% a month (rarely using leverage) and a relatively small max draw down of 6% so far in 2009...Are there still good prop opportunities available for traders who don't have computer science or statistics backgrounds?"

Performance is king. Show that kind of record in a live trading account to enough people and somebody will fund you.

Be prepared to tell them how you're doing it. Not your "secret sauce," but rather an overview of your decision-making methodology. Scalability is important, but since you're in forex that shouldn't be a problem.

Shuhan said...

Hi,

would just like to pass along the website for our proprietary trading firm

www.bgtradingllc.com

we are hiring!

Buttonwood Group Trading Staff

Trader Kevin said...

Shuhan, your link didn't work. Is Buttonwood located in the Board of Trade Building?

Jacob said...

Hi DR. i really like this website By the way helped me a lot on what i wanted to know. I do have a question though. I just got offered a Job at this prop. firm and they want to set me up on my own computer and that means I am able to trade from home and they are willing to give me 10-1 with a minimum of 10k is this a scam will this place close down next week?

Evan said...

What if you submit paper trading statements?
Does that count?

Brett Steenbarger, Ph.D. said...

Hi Evan,

Better than nothing, but there's really no reason someone can't trade a small account with a discount broker and show some real time performance. If a person lacks the capital to do that, they surely lack the capital to survive their learning curve at a prop firm.

Brett

Beau Garrett said...

Brett,

I am interested to know if the prop firms would be interested in seeing the results of my sim account, or do they only care about live account results?

Brett Steenbarger, Ph.D. said...

Hi Beau,

A sim trading record is better than none, but even a real time track record with a small account is better still for a prop firm--

Brett

Antonio said...

Brett,

What do proprietary firms consider to be a good trader? One that makes per year at least 30%, 50%, 70% ....?

Thanks
Antonio

Christopher said...

Hello Brett,

I have been trading now in my own account for about 3 years and I have a fully established procedure / risk management strategy. I do, however, do swing trading rather than day trading. I sent my P&L to a firm and discussed my personal situation which was that I needed to be able to trade remotely and that I have a full time job. Their director looked over my trades and said I could start trading 5x my retainer then after 30 days go to 10x if all goes well. After speaking to him today, he seemed to forget about our previous discussions and then told me it wouldn't work because I need to be in front of my computer all day in case anything happens.

Are there any firms out there that would provide firm capital that allow swing trading (holding overnight) and allow you to enter trades before the market opens and place risk management brackets on these trades so that you don't have to watch them intraday?

Thanks,

Chris

Brett Steenbarger, Ph.D. said...

Hi Chris,

I'm not aware of any prop firms that would fund such a strategy, but I'm no longer in that corner of the world so am probably not the best source of info on that.

Brett

Antonio said...

Hi Brett,

What do you think is a good trader?
One that makes a year 20%, 40%,....


Thanks
Antonio

Antonio said...

Hi Brett,

A few weeks ago I attended a trading seminar where the presenter claimed he was making 30% a month. After a few computations I realized that an initial 10 thousand investment would transform into 150 million in 3 years and the guy would be richer than Gates or Buffet in 6 years. I then thought that what he was saying was highly unlikely to be true. Over the years I have heard extraordinary claims that sounded to good to be true. When does a claim become suspitious? 100% a year, 200%,...?

Many thanks
Antonio

Brett Steenbarger, Ph.D. said...

Hi Antonio,

In a zero rate environment, a 15-20% annual return after expenses on a solid risk-adjusted basis will keep a professional trader at a hedge fund employed for a long time. Would be gurus and fly by nite "prop" firms need to promote huge returns in order to justify trading to undercapitalized traders.

Brett

Davor Urosevic said...

Hello
Can you tell me about prop firm https://www.tradingadvantage.com/
they offer education, profit share, up to 100k for trading and trade from home. It looks very good and I'm very interested for that.
Any comment or recommendation.
Thank you
Davor