Training for Traders at Proprietary Trading Firms

I've been receiving an above-average number of email inquiries from people wishing to join training programs at proprietary trading firms. Although I don't maintain a referral list of such programs (the Education Department of the Chicago Mercantile Exchange has a list of member prop firms; they're a useful source of education and information), I can give you an idea of what to look for during your search.

First let's review terminology: A proprietary trading group is a group of traders that trades the capital of the firm. The firm puts up the trading capital and provides risk management, computer (IT) support, office space, and brokerage arrangements. This is in contrast with a trading arcade, which provides office space, computer support, and brokerage, but does not provide trading capital. It is a group environment for trading your own money.

A proprietary group typically generates its income from a split of trading profits, as well as by charging fees for overhead ("desk fees") and commissions. An arcade often acts as broker and makes its money from fees and commissions, but--because the trader is trading his/her own capital--does not typically take a large share of trading profits.

As a rule, firms that generate more of their own income from a split of trading profits have a greater vested interest in providing traders with ongoing training. After all, if the traders succeed, they succeed as a firm. When a firm is making most of their money from commissions, they'll generate income whether traders are profitable or not. They have less of an incentive to provide ongoing training.

Most prop firms and arcades are small operations when compared with investment banks and hedge funds. Rarely can they afford full-time staff dedicated to training. This is not necessarily out of a lack of interest in training; it's a simple economic reality. New traders trade small, and even with training, a high percentage of new traders do not succeed in the long run. It is very challenging to make a dedicated training program pay for itself.

As a result, much training at prop firms is either informal--the result of connecting with a senior trader and obtaining advice and mentoring--or is limited to several-week courses that precede live trading. Of course, it's too much to expect that a several week course could lead one to trading proficiency. Mostly the courses teach traders the basics, such as how to use the trading platform, how to manage risk, etc. It's the follow-up to the course work that is all-important.

So here are a few things to look for if you're interested in a proprietary trading firm:

* Is there a person (or persons) at the firm who take a dedicated interest in training and actively participate in mentoring new traders?

* Is there an actual training course or program that precedes live trading?

* Is the trading firm invested in training? Do they obtain a significant share of their income from splitting profits with traders?

* Does the trading firm enable you to practice trading in simulation mode prior to going live? Is someone available to provide feedback about simulated trading?

* Does the trading firm demonstrate and explain specific trading methods/setups and provide tools for identifying and trading these?

Here's an example: I'm currently working with a firm (*please* do not ask me for the name; all firms I work with are entitled to anonymity) in which the head traders share their trades with the new traders in real time. This provides valuable ongoing modeling and education. They don't have a formal course, but instead embed training into each trading day. That's the kind of commitment you want to see from a trading firm.

Of course, you'll have to match that commitment with your own. Stated motivation is not enough. I strongly, strongly recommend that traders trade in simulation mode and live (with small size) on their own prior to trying to join any prop firm. There is a great deal you can learn on your own and with online resources (including blogs and live trading rooms) and books. If you can demonstrate a favorable learning curve to a prop firm, you will be someone they want to train. For more advice on joining a prop firm, check out this post.

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