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.


Joining a Prop Firm