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.