Saturday, January 24, 2009

Jobs With Proprietary Trading Firms: Five Pitfalls to Avoid

I've received a large number of emails from traders interested in joining a proprietary trading firm. Many of these correspondents appear to lack understanding of prop firms and what they have to offer. This leaves them open to pie-in-the-sky promises from less than reputable firms. The links below should help traders in their quest for a trading firm. Below are five pitfalls that you want to make sure you avoid:

1) Firms that promote high frequency trading and that make a significant portion of their money from the commissions they assess their own traders. Make sure that the prop firm makes money when you are successful, not simply when you trade;

2) Firms that charge high fees for training and then offer generic educational programs on technical patterns, how to use software, etc.--material that is readily available in the public domain. Make sure that the training is substantive and directly applicable to the trading you want to learn;

3) Firms that charge deposit fees or other down payments for joining. I have heard of several firms doing this; none of the reputable firms I work with would consider it.

4) Firms that charge money for getting in the door (either through high training tuition fees or down payments) and then strictly limit your access to capital and hold you to ridiculously small daily loss limits. You never have the chance to make real money, and once you lose half of the tuition/downpayment fee, you're shown the door. Total scam.

5) Firms that have you put up a share of capital in case of losses. This is not a prop firm. There are "arcades" in which you can trade your own capital and keep the vast majority of your profits. Beware firms that find ways to hold onto your cash (by not paying you a significant portion of your profits, for instance, at the end of a pay period), so that you're at risk, not them.

There's no substitute for interviewing at a firm, talking with their traders, and finding out who is making serious money there and who is satisfied or dissatisfied. If a firm restricts your ability to perform due diligence, run--don't walk--in the opposite direction. Given unemployment, the ease of trading online, and recent market volatility, prop firms are springing up like weeds, making alluring promises to would-be traders. Be careful.



Adam said...

I met a guy on an airplane. He told me he ran a prop firm. I mentioned that I had "limited experience." He gave me his card.

I visited his firm's web site. Some verbatim extracts:

"Your dream of becoming a professional trader is closer than you think."

"You will have a complete plan to place trades that will last from five minutes to five days."

Learn to:

"Interpret the major market indices like a pro using two simple set ups and learn when you should NOT buy new highs or short new lows."

"How to build a position; and add to a profitable one, just like a hedge fund would."

I particularly like this hedge fund bit, do I get to choke up redemptions just like a fund, too?

"• No experience is necessary to understand and make money with the plan"

"• Increase your monthly income significantly with very little stress"

"• Completely understand how the market works so you can manage your investments like a professional"

"Enroll Today - two convenient payments of $1,247.50"

:You get a 280 page work manual with illustrations and detailed instructions you can review when you get home."

If only I'd known! I wouldn't have spent so much time learning mathematics and programming! I feel like such a fool. I'm gonna cut my losses and enroll!


Brett Steenbarger, Ph.D. said...

That is classic, Adam. Unfortunately, in this economic climate, too many people will fall for such false promises.


Brett Steenbarger, Ph.D. said...

That is classic, Adam. Unfortunately, in this economic climate, too many people will fall for such false promises.


Gary said...

Hi Dr. Brett,

I see that SMB is now charging $7,500 for a month- long training class at their firm. Does this change your opinion of them as I know you have recommended them in the past? Thanks. P.S. I just finished Enhancing Trader Performance and found it to be one of the two best trading books I have read (the other being "Trading in the Zone"). Keep up the good work! Gary

Happy Camper said...

First of all. This blog is great and I try to read it every day and I get some new ideas quite often.
Im a trader living in Europe and I want to move to USA sooner or later. If I move to America I want to start trading for myself or for a prop firm. Currently, I trade stocks and ETF's. If I should start trading stocks for a prop firm (and can show a fairly good track record), what is a normal profit split between me and the firm? How many percentage of my winnings can I expect to keep?

IDkit aka Ana said...

Gong xi fa cai, Brett, to all your Chinese readers.

This ushers in the Year of the Ox which normally symbolises the bullish scenarios! But we all know this is, cannot be the case; more like symbolising the year of hard work, another characteristic trait of the bull.

Having said this, we see your Quote:

Given unemployment, the ease of trading online, and recent market volatility, prop firms are springing up like weeds, making alluring promises to would-be traders.Unquote

Caveat: we need to do due diligence and not be taken in by slick snake-oil promises. Any true trader knows successful trading is simply hard to achieve.

Xin nian kwai le!

Ross G said...

I am a partner at a prop shop for 12 years, we dot require any money to trade, just experience. Traders are not promised anything but a fair shake. New traders have access to experienced traders if they seek it out. Our turnover is low by industry standards, and it's not so easy to get a job or keep your job. serious folks who work hard for their

Brett Steenbarger, Ph.D. said...

Hi Happy Camper,

A 50/50 split is common, but other factor are important, such as commissions and fees that may be charged. It's important to get the whole picture.


gaugamela said...

Dr. Brett,

I recently got "invited" to the March class at SMB Capital but was just told to show up next Friday to sign the paperwork and bring in my check. I was shocked! At no point during my "interview" process was I asked to put up money. I was EXTREMELY disappointed because I thought that they recognized talent in me that could improve their capital base.

On my end, I should have been more direct in asking if they required a capital infusion.

After learning of the "training fee" I would have to pay to join SMB Capital, I asked one of the partners why. He mentioned all "professionals" are asked to pay. When I asked him about recent college graduates, he said they get a "scholarship."

So everyone out there: if you want to trade with SMB Capital -- make sure your 22. Otherwise, cough up $7,500.

marc said...

Same thing happened to me with SMB. One of the founders never mentioned putting money down, basically offered me a job with just an email sent on my part.

I have 15 years prop experience. I asked if he reviewed my resume...I then checked...I never sent one. He had no idea about me or my experience.

Told me I could start in 5 days, still no mention of money. It sounded to good to be true, so I asked about any deposit? He said oh yeah $10,000 is required to start and we limit you to $300/day losses for 2 weeks.

You guys can do the math...

Bella said...

We have enormous respect for Dr. Steenbarger and TraderFeed so I thought it was important to clarify some comments about SMB. Our traders read TraderFeed religiously.

We have a formal interview process. Currently, I am writing a book "The Way of the Prop Trader" for Wiley Publishing. One of my chapters outlines some of our recruiting process and shares some interesting stories. Just a quick summary....

There are three rounds of interviews that every trader must navigate before they are offered an invitation to trade with SMB Capital, our proprietary trading desk. Recent college graduates and traders with a consistently profitable day trading record, the vast majority of those who we recruit, do not pay for training and trade firm capital.

Some professionals, who are financially secure and looking to transition from another occupation into trading, are eligible to train with us. And for these individuals there is a fee for training. However, your chances of receiving such an invitation are one in one thousand resumes.

Recently, we created SMB Remote Training, which is separate from our prop desk. Those who wish to train with us but are either not offered an invitation to our prop desk, live outside NYC, or just want to train remotely can receive our training. There is a fee to participate in SMB Remote Training. We deliver our training via our website, SMB Training. All that we teach our NYC traders is offered to you.

My partner Steve interviews transitioning professionals. He does so after the Close and a full day of trading. It is possible that after 90 hour work weeks, 6 1/2 hours of grueling trading, and ten other pressing tasks on his mind that he once failed to mention our structure to an interviewee. If he did, then this was our mistake. There was candidate who made this claim and we profusely apologized.

As to receiving an invitation without sending a resume, without three rounds of interviews, this is not our policy.

SMB offers an excellent training program for new and developing traders. We have been in Trader Monthly. Some of our teaching techniques were highlighted on "Wall Street Warriors". We share market lessons and trading stories on SMB Blog. Today as I write we will be on CNBC's Fast Money. I understand that with exposure comes public comment. But for those who have never visited us, we do everything we can to help our traders succeed.

And for those considering day trading, please visit the excellent firms where you can start your career. We are one of them. After your due diligence, make up your own mind on what firm is the best fit for you.

Best of luck with your trading!

Joseph said...


I work for a prop trading firm and depending on time worked or net proffits earned you get 30, 40, or 50% of your net. We pay $4/1000 shares traded. Is this a competative commission rate?

Thank you,

Brett Steenbarger, Ph.D. said...

Hi Joseph,

That's not far from a retail rate, but really you have to look at the whole picture (profit split, fees, commissions, access to capital, services provided) to judge a prop firm--


Trader Kevin said...

Several years ago I was about to sign a deal with the prop unit of a CBOT clearing house. However, one clause of the contract said I would be on the hook for half the losses. When I questioned this, they threw me out of the program. (Fortuitously, it turns out.)

The style of trading they advocated wasn't successful. Being a clearing house unit, they wanted you to "trade 'em up!"

Eventually the clearing house shut down the unit, then sued to collect losses from their former traders, some of whom signed promissory notes.

Funny thing is when I first questioned the clause they said, "That's just boilerplate, we'd never actually try to collect." They dumped me when I replied, "Well if you're never going to exercise it, let's take it out of the contract."

As you've implied, a bad deal is worse than no deal at all.

r_stackman said...

Hi all,

Has anyone heard of a prop firm in Chicago called Pro Trading Course?
If so, any opinions. I'm still skeptical about signing any contract.

I read past posts and they have been helpful, but I'm still cautious about this idea.

Thanks in advance.

r_stackman said...

Hi all,

Has anyone heard of a prop firm in Chicago called Pro Trading Course?
If so, any opinions. I'm still skeptical about signing any contract.

I read past posts and they have been helpful, but I'm still cautious about this idea.

Thanks in advance

Brett Steenbarger, Ph.D. said...

Hi R Stackman,

Sorry, never heard of them or worked with them. The name doesn't really sound like a prop firm; sounds like a firm offering training. I am cautious of "prop" firms that make money from training and promises of trading prop capital after you've plunked down big $--


teri said...

I received an e-mail from Bourbon & Bayonets -Oakshire Investment Research to attend a session online with subject "We will give you money to trade". The e-mail had big red highlight "Trade with Company Capital. You trade with our money"

During the web session, the firm offered special price $795 (regular $1295 to sign up within approx 45 minutes) for training with their prof traders. Profit sharing 75/25 for trader and firm respectively. Most tradings tend to end within 2 hrs but not necessary. Only top 10% of the traders will be selected from a competition to trade with firm's capital. The fees allowed 3 attempts to enter the competition. Does this sound too good to be true?

I did more research and found your website. I have a background in financial fraud investigation and also a day trader. Do you think my skepticism is correct?

Brett Steenbarger, Ph.D. said...

Hi Teri,

It might be worthwhile to pay money for ongoing training in financial markets; it is not worthwhile to pay money to be hired by a firm, IMO.


IDkit said...

I concur with you, Brett.

BTW this post is almost a year ago when I wished all , and by next Sunday week, I will be wishing all Chinese friends, again.

Gong xi fa cai!

guruofthemarkets said...

I was also disappointed because I felt mislead by SMB. Nobody there can dance around the fact that they mislead people in their interviews. WIth that said, they are a nice group of guys with some potential.

Please comment on SMB Dr. Steenbarger. I think it's important since you've mentioned them before.

The Reel said...

Does anyone know anything about Maverick Trading? They have a hefty upfront "lifetime membership fee" of $6,000 plus $199 monthly desk fee and $5,000 risk capital when you start live trading. Does anyone have any insight on Maverick? If so, please share! I am considering accepting this trading invitation but I'm concerned there's something in the fine print that will ultimately prevent me from earning enough to at least cover my initial investment. Thank you in advance for the input!

Brett Steenbarger, Ph.D. said...

Hi The Reel,

Paying to join a firm strikes me as odd. The other arrangement that can be problematic is high commission fees. Those can make it difficult to recoup any "investment".


Simon Crowther said...

Hi Brett

Thanks for your article and list of prop firms. I wondered what you think of new proprietary trading firms that may have started since your post, such as TopStep Trader. They typically offer 70-80% profit share but charge for trials and have a fairly tight set of criteria to meet to pass. Some of these are discretionary (like TopStep), others promise to back you if you pass the test.

Brett Steenbarger, Ph.D. said...

Hi Simon,

Not familiar with TopStep; sorry. Each firm is very different, and it's important to read the fine print and understand the deal being offered. A high payout is not necessarily desirable if fees and commissions are high and if the trader is putting up significant capital at risk--

Simon Crowther said...

You aren't risking any capital on the trials or afterwards, actually. You just pay a fee for the trial and if you meet certain criteria, you get a refund. It's just a question that the firm stands to profit from your failure, as well as from your success. They claim to have liquidity providers, but I suspect they get much of their revenues from the trial fees. Some do offer large amounts of backing though.

Adrian Kozameh said...

Hi, thank you for your insights. I'm a bit lost though, are there any real prop trading firms left? I've been looking for a while and it seems the only thing out there are the bs "market gurus" that try to legitimize themselves through bs tv appearences and want to sell you their "training program". What ever happened to a firm making money from a traders performance rather than from sign-up fees? I am a quantitative trader looking for capital to trade (imagine that!) and it feels like nobody wants to make money trading anymore. What ever happened to Wall St? Has it really all been reduced to a pathetic sign-up fee? Any guidance is greatly appreciated. Thanks in advance for your help. Trade well.

Brett Steenbarger, Ph.D. said...

Hi Adrian,

The prop world is much smaller than it used to be. There are firms out there, however, and some hedge funds will seed developing quant managers. It might take a professional recruiter, however, to help you find those funds if you aren't in a location where you can readily network--