Friday, July 04, 2008

Proprietary Trading Firms, Arcades, and Scams

I've received several emails lately in which traders asked me about joining proprietary firms that offer training for very high fees (many thousands of dollars/euros). The traders want to know, "Are these firms legitimate?"

I have very sincere doubts.

A proprietary trading firm is one in which you trade the capital of the firm in exchange for a split of profits. An arcade is a firm in which you trade your own capital, but the company provides the trading infrastructure, including member commissions/fees. At an arcade, you pay for the overhead/commissions but keep your profits. Prop firms can be good options for traders who lack sufficient capital for a meaningful account; arcades can be good options for successful traders who benefit from the lower overhead associated with economies of scale. Both options offer access to other traders, which can be a benefit.

A firm that charges for training with the promise of trading proprietary capital sounds like a scam. It reminds me of modeling "agencies" that charge for classes with the promise of contracts that never materialize. They make their money from the training fees, not from splitting fees with successful professionals.

At the very least, if you're considering such an arrangement, exercise due diligence and make sure that the firm can put you in touch with traders who have completed the training and are now trading prop capital for a living. If they can't do that, you surely know you have a scam. But let's face it: if a firm was successful in training traders and was confident of their success, they'd make plenty of money from the profit splits. They wouldn't need to talk traders into huge training fees with pretty promises.

And, really, is a several week course going to turn a beginner into a successful trader? Caveat emptor.

RELATED POST:

Joining a Prop Firm
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15 comments:

Christian said...

Brett, I read your blog every day and put your teachings to use in my trading often. However, I cannot let this post go. With all due respect, and because many potential prop traders (in every sense of the phrase) read your blog as often as I do, you should do your own due diligence on these firms that you may think are scams. It's very possible that you may have been referring to a firm of which I am a member, so I felt the need to respond although cannot speak for them.

I implore you to contact the heads of these firms and make your own judgment from there. Yes, there are those firms that take advantage of those looking to trade however, in my humble opinion, there are a few that do not fall under the scams that you described.

Brett Steenbarger, Ph.D. said...

Hi Christian,

Thanks for your comment. The last thing I want to do is impugn all prop firms. There are many very fine ones out there that operate with considerable integrity. I work with several of them.

I don't know your trading firm and, alas, cannot possibly conduct due diligence on every firm out there. That has to be the responsibility of each trader seeking a position.

Prop firms do charge fees to traders (so-called desk fees) and some of those may be used to defray costs associated with training. There's nothing shady in that. The situations I have heard about, however, sound quite different from that. The training fees are enormous (so much so that they are an obvious profit center for the firms), and the promises of prop trading are murky. That raises my concern that these could be scams.

As I mention in the post, if the prop firms that charge for training can provide references of traders who have successfully completed the training and now are managing meaningful capital from the firm, that would lend credibility to the business model.

That having been said, I truly can think of no major prop firm in Chicago (one that is a member of the major exchanges) that operates on this kind of model. It is not necessary to pay big bucks to get in the door at a good firm; a successful track record goes much further.

Brett

KidQuantum said...

Brett, here in London there is a third model. You are charged a certain amount for the training, but that includes a trading account with the firm. If you show promise you are kept on after a certain period.
Effectively its like going to an arcade with your own money and receiving quality training before trading.
Its good for the firm (if its fair and decent) because they get to back traders who offer a buffer against the firms potential loss. It is also good for the individual who gets the same education given to the firms own backed traders and is guaranteed an opportunity to prove himself.

Also you should maybe read all testimonials or speak to a few graduates of these 'paid for' training courses.

There are most definitely people who have done these courses and either made it or not as traders. The common thread is that they all feel that they had a fair deal and a real chance.

Brett Steenbarger, Ph.D. said...

Hi Kid Quantum,

That's an interesting concept; do pass along links to firms that you believe offer quality training via this model. And I totally agree: talking with graduates is important. Personally, I'm not sure I'd find written testimonials helpful if I couldn't talk with the traders.

Brett

David said...

Brett,

A link to this blog is found on the SMB Capital testimonials page. I dont see your name near the link, so i wanted to confirm your endorsement. seems relevant to this post to confirm your endorsement. scroll to the bottom. http://www.smbtraining.com/?q=testimonials

thanks

Brett Steenbarger, Ph.D. said...

Hi David,

What you're referring to is a quote from one of my blog posts, not anything that I crafted as a specific endorsement. My goal is to make traders aware of promising resources; the need for due diligence, to ensure that the resources will truly meet one's own training requirements, remains.

Brett

Common Sense said...

Brett,

I am highly suspicious of a company that wants me to pay them to learn these "proprietary" guru strategies. I've known a few firms like this (been in the business 15+ years), and some instructors even told me they keep the "good stuff" for themselves. Then they sell you books they wrote, CD's, etc...that seems to be their main business model. simply public speakers that spend more time marketing than anything else.

It's as if they decided it was more profitable to teach their methods and share them to the public, then simply keep such valuable assets and trade for themselves.

If these firms could show audited P/L's of all their traders, I would be more inclined to think it wasn't a scam. When they don't, sorry, scam.

DreamJOBZ said...

Dear Brett, I too read blogs everyday and take your psychology part with me.

I know you are trying to be honest & try to help people to identify the good one from the bad one. If your intensions are honestly on this care for others. Then it is my suggestion tell us how to find the good one first, and then the bad one later. Thump rule or commen sense will not work here. My personal eperience with training company is good and my results are consistent. As our focus is only on consistency. We come in completely different angle.

This post reminds me the following paraphrase which strikes me in between my my eyes,

When other fellow takes long time he is slow, when I take a long time, I am thrilled.

When other fellow doesn't do it, he is lazy, when I didn't do it, I am busy.

When other fellow does something about without being told, he is overstepping his bounce, When I do it, I 'm initiative.

When other fellow over looks a rule he is rude, when I skip few rule, I am original.

When other fellow pleases the boss, he is a apple polisher/manipulator, when I pleases the boss, it is co-operation.

When other fellow gets a head, he is getting a break, when I get a head that is reward for hard work.

If these training firms sound like scam, then what you are doing? What service you are on? Then what is Teach One Each One Premium Service that you are coming out with? My lips are sealed.

See, contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.

PS: Remove this post if it jeopardize your professional dignity.

Be Honest & Be Awesome,
Raj, DreamJOBZ
www.DreamJOBZ.Com

Brett Steenbarger, Ph.D. said...

Hello Raj,

Here is a post on evaluating trading firms:

http://rurl.org/1y08

I'm sorry you misunderstood my sarcasm in an earlier post; I am not developing any commercial, premium service. My site is non-commercial; there is no contradiction here.

Brett

DreamJOBZ said...

Dear Brett, G'day,

I was not worried/concerned about your sarcasm. I'm concerned about your comfortable judgement still on surface level. Because it is unfinished article, there is no conclusion. It makes the reader to conclude themselves, again which leads them to comfortably understanding of this article, "Proprietary Trading Firms, Arcades, and Scams".

Now you have given me this link. Well again, what about Pure Training Company on Trading? Of course, they charge. Isn’t it legit? For me, their charges are nominal, which ranges from US$ 900+ to US$ 2500 (depends on countries) which trains people thru regular gathering for every 2/3 months in 40 countries. (But at present only few listed countries) in their websites, you can check if you want, www.OrangeRoshan.com (well I am not benefited by putting a word across to you all) Please go ahead check yourself. They are purely training company. And on top of that they give access to their Trading Forum where new traders can interact with 100s other traders. It takes minimum 2-3 years to prepare someone to be consistent on their trading. Do you call this scam?! If so, I won't call this is "Dishonesty by Delusion", I call it "Dishonesty by Laziness". I am sorry, if I am challenging your core value.

Personally, I have tried many trading methods/systems it all works for sometimes and then we started to see where it fails. So generally, we create EA for every method and back test it for 20/30 years. This is usual for any professional traders. The system which I am learning & teaching others thru Forum has very stable logic and it is very objective. It is rule based. The more I teach I get stable discipline on the system while trading. I can teach any students I want with whom my chemistry goes well. And yes, this creates Loyalty & Value to me. I want to be loyal to them also as well as the originator of the system. Again does this sound like scam?! LOL.

What they teach is not magical; it is very simple and logical. It is the way they train the new/ senior traders, it is the method of training makes the difference from others. That is what I am trying to emphasize here. There are some good training companies out there.

Be Awesome,
Raj, DreamJOBZ
www.DreamJOBZ.Com

Brett Steenbarger, Ph.D. said...

I'm sorry, Raj, I don't understand your defensiveness. I never said that all training is a scam, and I have no clue as to the specific services that you're referring to. My point is simply that using a false promise of prop trading as a way to entice people into training programs is a scam.

There are several training programs I've referenced on my site that I think do a fine job. In all such matters, due diligence is key.

Brett

DreamJOBZ said...

Dear Brett, G'day

My apologies, if I sound like defending. My intension is to explore the article. We can talk about this later, if we get an opportunity to sit and discuss with a coffee.

Thank you for what you are doing. You are awesome.

Keep Chargin'
Raj
DreamJOBZ

Brett Steenbarger, Ph.D. said...

Not a problem; thanks, Raj. Best of luck to you--

Brett

Sean Wright said...
This comment has been removed by the author.
Brett Steenbarger, Ph.D. said...

Hi Sean,

I wouldn't associate with SMB if I thought they ran a scam. I have found them to be thoughtful and forward thinking in their approach to trader education. They are teaching a distinct set of skills related to reading the tape and intraday trading. The key issue is whether what they're teaching matches your interests and skill sets. MIT can offer a great education, but if I'm wanting to develop a career in the performing arts, it might not be my best choice--

Brett