Seems like there are bits and pieces about prop trading firms in a few different threads in this forum, so I thought it might be worthwhile to consolidate experiences and discuss the state of the industry, as lots of poker players have expressed interest in making the leap from poker to trading.

I worked at a top-tier trading firm for about a year (didn't get canned, left voluntarily) and now trade some algorithmic strategies in my Interactive Brokers account while holding down a full-time job in another industry. I've also considered trying to get back into trading full-time recently. My knowledge of the current state of the industry is probably like a 6 or a 7/10, so I'm probably going to be both giving and receiving knowledge in this thread.

I'd put the industry in 3 broad categories:

Top-Tier Firms
EX: Susquehanna, Jump, Jane St.

Focus heavily on market-making, particularly in options markets. Heavy focus now on low-latency strategies (think "Flash Boys"), which means backgrounds in Comp Sci / Engineering are most valued. Pretty tough to get a job here if you aren't coming out of a top school, preferably with a quantitative graduate degree. Pay salaries of generally >$50k (and sometimes much more) that are risk-free (e.g. as long as you're an associate you get a check, even if you blow a bunch of capital), and very nice benefits. Trading education is generally extensive and top notch, and because of this you will likely have to sign a restrictive non-compete.

Mid-Tier Firms
EX: Eldorado, WH, Schonfeld

Focus on a lot of different areas of trading, but don't have the infrastructure to compete with the Top-Tier firms in the low latency space. Competitive to get into (must be good at math, usually have a degree from a good school, etc.), but not nearly as much so as the Susquehannas of the world. Trading education exists, but is limited. Compensation comes in the form of a small guaranteed salary ($25k), limited benefits, and a cut of whatever you make trading, assuming said cut exceeds the salary.

"Bring Your Own Capital" Firms
EX: Bright, SMB, Maverick

These firms will take pretty much anyone, but require them to post their own capital, either in the form of collateral (I know one that requires $50k) or in paying for expensive trainings. In the "collateral" model you take the risk of trading your own money, and generally get to keep >95% of your profits. In the "training" model you pay an upfront fee, and then trade the firm's capital, where you take no risk but also get <50% of the profit you generate. I can't really comment on the quality of the training but I assume it's nothing great. IMO anyone who is about to do this should seriously consider just trading a leveraged IB account instead, though I'm open to hearing arguments otherwise.

Feel free to correct anything I've said above, and to share your own experiences in the industry. Also happy to answer questions, though I'm sure others in the thread will know more than me.

I trade at a BYOC firm, and know some guys from Bright and SMB, as well as a mid-tier place. They "trained" a group of around 9 guys when I first started, and after 3 years I was the only one left.

Based on my opinion of what goes on at mid-tier firm, it's probably not worth it. They potentially get some good training, and possibly get to learn from some big earners, but the appeal of putting up no capital isn't worth it. If you're making money trading, you aren't trading the firms capital, you are trading your own profits.

I have a buddy that trades at a place like this. He has the luxury of having nearly infinite BP and access to all kinds of software. But if we both take the same trade with the same size, I make 65% more just because of profit split.

I worked for "local" prop firms in Chicago for 25 years. They were primarily involved with backing floor traders. Once the floor started drying up they moved a lot of their focus on screen trading. I was one of the first to make the move from floor to screen. I was involved with a lot of different trades, arbs, and portfolio management.

When they shut the doors at the end of 2014 I looked at the top prop firms but couldn't even get a sniff from them. Partially because I am old (obviously!) but that they aren't interested in trading experience or non-technical degrees (MBA-Finance). They want guys who can program. PERIOD! If you aren't fluent in programming languages don't even bother. I worked with a lot of programmer types in automating strategies at my firm and not one of them could trade their way of a wet paper bag

Wasn't interested BYOC because I can just trade on my own and keep it all with all the size I need or want. I'm real happy just trading on my own dime.

If you want to work for one of these top tier guys learn how to program.

I've applied at all the prop firms I could find, I landed two interviews and i'll describe my experience with them both.

A little about me: i'm 27, I have a finance degree and work in risk analysis for a non-market related corporation. I have had a decent amount of success playing poker, and i'm relatively certain that the interviews I landed were directly correlated to my poker success, as I feel pretty average education/job wise.

1. Bluefin trading:

I did not make it through the first round of interviews. They asked me complex brain teasers and questions, and I managed to answer them all correctly. I thought I did well. They informed me later that I was too slow to answer them, and that was that. I was honestly pretty surprised not to have passed, I was pretty proud of myself for generating the correct conclusions to each, but granted it did take me a while.

2. Eldorado:

I'm surprised you've even listed this firm as mid tier. I went through 3 rounds of interviews here, for a position exclusively trading LIBOR futures. Questions ran the gamut, from your standard behavioral to brain teasers and math questions. In the final round, they put me in a room with music playing, and timed how fast I could perform simple math functions with the music playing and them trying to distract me etc. I was offered the position here, the terms of the deal were as follows:

- 5 days a week. I would work 6PM to 6AM.
- I would be given a salary of $28,000. I was able to keep 5% of the profits generated in the first two years.
- I was required to fund a reserve fund of $50,000 from profits generated to cover against potential losses. This fund would come from my profits generated from trading.
- They had the right to terminate me if I did not generate $50,000 in profit, each month, every month.
- After two years, if you've made it that long (they said less than 1/3 made it this far) you would be made partner. At this level, you could keep 50% of the profits generated.

Obviously, they would've taught me the tricks of the trade as I know next to nothing about LIBOR futures trading, and certainly not how to profit from it. It involved taking advantage of changes in the dynamic yield curve on the LIBOR futures rate, trading in and out of positions for only a few seconds at a time. They told me they generated over 25% of the entire trading volume in this specific trading instrument.

After some thought, I had to decline the deal, as much as i'd love to trade for a living the terms of the deal and the opportunity risk were just too much for me to bear.

I'd still love to trade for a living, and I welcome any insight on how I personally could break into the industry. I don't have a programming background, but I am pretty intuitive and really do feel like my innate skillset would be great for something like this.

I worked as an equities floor options market maker at the tail end of the floor era (99-04), for three firms that varied from the small with a staff of four, to a publicly listed financial firm. Then played poker while getting a couple extra degrees. Then switched to commodities and wound up at an investment bank in the size range of #5 to #10 (not top 5).

Bank trading desks used to have a broad range of prop and flow (buyside/spec'ing and sellside/market making). Now with Volcker rule, unless you are offshore US (and UK as well?), it's pretty limited to market making. Which leaves less room to take risk, try your own ideas, create profits on your own (to hopefully be rewarded for)--and generally just not be bored. But it also takes away the expectation of taking risk and creating profits on your own in order to survive.

I've always felt there was gulf between serious trading operations and chop shops that exist to milk the naive. These operations that take you in, spout some chart reading lingo, and then throw you in front of a screen on a strict probationary period--I think these places make most of their livelihoods off fees they're charging you while hoping you break even trading random noise. What's your clearing and commission per share? If it's more than half a cent all in, you're probably being burned. (One neat little trick I learned in floor market making firms is that the partners can have the clearing firm charge you one rate of commissions on your sheets--but in fact that charge has been juiced up and is secretly being divided with your own bosses.)

I'm really of two minds about technical analysis. I'm pretty completely skeptical of chart reading. 99.9% of the time I see someone talking about shoulders and pennants and tea cups, support and resistance, it's a given that they have never operationalized and backtested any of these supposed concepts. It's 100% "intuition". Ie, BS. But at the same time I am aware of the academic finance research literature, on technicals (eg price momentum) and fundamentals (eg earnings quality). And I "buy it". And am working on some algorithmic stuff for options myself that has maybe a slight chance of being applied by me full time.

So my opinion is that if you are interviewing for a job where your trading is drawing lines on a picture (which are not backtested, not scale invariant, maybe not even translation invariant (what happens to your candles if you shift every interval by half its width?)). And their business model is to take random guys who are trained with nonsense and make a living off those guys' fees--Run Away.

Real prop trading, at the likes of a DE Shaw or Och Ziff--I'm not sure I haven't been there, but some of it may be by intuition (is Bridgewater's business model nothing but Ray Dalio's instincts??) but I think most of it is based on arbitrages. Arbitrages that are not accessible to the retail investor. Eg, CDS vs small delta puts. Converts vs equities vs options. Stat arb (okay that's more accessible). And of course all the algo and HFT stuff that mostly depends on programing and networking. And there are still those who get rich on raw fundamental analysis (eg, Loeb's activist investing--but I think this bleeds more into Private Equity). But none of this is stuff you are going to learn in from some guys reminiscent of Glengary Glenross in a Chicago chop shop.

So how do you get into top hedge fund prop trading? I think there's a rather hopeless answer and a slightly hopeful one. The hopeless answer for 99.9% of people is depending on the slight variations of firm type: for DE Shaw type quant fund--math or physics phd from top program; for Bridgewater or Och Ziff--probably a big name MBA; for top HFT fund--Stanford or CMU type comp sci phd.

An indirect path to those jobs above has been through investment banks. But those jobs have the same barriers of their policy of recruiting by pedigree. (Some banks, I think it's rather rare, do commonly recruit junior traders from back and middle office. Again, I think it's rare, and that the GSs and JPMs hardly if ever do that.) And in particular through investment bank prop desks. Which were often the equivalent of those top hedge funds. But beyond the same problem of getting in teh door--bank prop desks are pretty much gone now.

So finally, what is hopeful. Two things. One, if you can find a small hedge fund, that trades a real edge, not charts, but like solid fundamental analysis, maybe you can sneak in as an intern. Of my peers coming off the options floor with me, most wound up as brokers. One has killed it as a broker. Some scrape by. The others flushed out the bottom end of the finance industry. Some others got bank jobs (many after getting another degree), with many of those ranging from good and solid to really great. But the biggest success is a friend who was like a 65th percentile student at a good but not head turning california school, with no techincal background in math and science or programming or even finance. He found an internship on cragslist in NY for a small hedge fund. 3 guys each covered one sectors. They made income statement spread sheet models just like all the business school clowns do in class. And they were great at forecasting earnings and traded long short. He progressed from intern to his own fund.

Finally, one other idea. There are funds that superficially seem a bit like those chop shops in chicago. They will listen to anyone who knocks on their door. And back anyone with a good idea. Give them limited capital, a short leash, and chop off anyone who lags behind at any time. I think millenium and maybe SAC function this way at least in part. But the difference that they do not "train" you. You need to come in with the complete package of goods. Preferably with an audited track record. But at the least with a backtested strategy that is researched and documented with Journal of Finance type analytical quality and thoroughness.

I've blathered on at random too long now. Sorry for not editing, but hey it's the internet and I'm anonymous. Maybe there's something somewhere in there that's interesting and not off base.

PS One final note: I do acknowledge that I may not be entirely right about what I am calling chop shops. While I'm confident that the bulk of that type of operation makes substantial income from fees off guys who are randomly break even. I just don't know whether there is also a substantial percentage of people who survive the winnowing process and consistently profit from trading on teh screen. Like the classic definition of an at-home, retail day trader. Trading the screen by intution without objective back testing. I think there are posters here who claim to do that over many years. I find it hard to believe. But that doesn't mean that I deny it. Some may be variance. Some may be lying. How many are really doing it I don't know.

PPS For historical interest: floor trading used to be a good back door into high finance that didn't require pure pedigree. The only job qualification required to get in the door (as a clerk) was to be able to fetch coffee and not cry when yelled at and being blamed for someone else's own mistakes. But, one, even back when I came out of it there were too many ex-floor traders, and it was hardly considered a qualification for anything in a firm. And, two, I think algos have pretty much repalced floor traders. But maybe still in a few products, or something obscure--I'm not positive.

PPPS My final general advice is: don't think you want to be and can be a "trader" (really, PM is the correct term) because you have "good instincts", a "feel for markets", are "quick on your feet". You need to have an advanced technical knowledge in one or more niches: financial statement analysis; derivatives valuation and thereby potential arbitrages; statistics (backtesting, maybe resampling, other robust statistics); highly optimized programming (like embedded systems type) and network optimization. Some of these you can get from a technical graduate school. Some of these you can get from a top tier finance firm without having them beforehand--but you probably need to have pedigree to get in.

Man, every response in this thread is really high quality.

Yep. I got hired in 2008 and I was probably one of the last people they let in the door without serious technical skills. I double-majored in Econ and Business, doubt I'd get a sniff at an interview any time after 2010.

I've been spending a lot of time learning Python the past year. Honestly "learn how to program" is my standard career advice for anyone right now.

Your whole post is a great overview of the industry. Really excellent stuff

Agreed with the quote-- for small guys stat arb is one of the most promising strategies and is what I do. The insane democritization of data processing, storage, and open-source modeling software presents some opportunities for individual investors that never would have existed even 2-4 years ago.

One question I've always had about arrangements like this, how is IP handled? It seems like it would be easy for a trader to get screwed in this scenario. I know a guy who did this at the top-tier firm I used to work at, but he had a strategy that really only worked for him (specifically, he was connected all around Chicago and saw block trades that nobody else had access to).

Quote:

Originally Posted by JoeC2012

"Bring Your Own Capital" Firms
EX: Bright, SMB, Maverick

These firms will take pretty much anyone, but require them to post their own capital, either in the form of collateral (I know one that requires $50k) or in paying for expensive trainings. In the "collateral" model you take the risk of trading your own money, and generally get to keep >95% of your profits. In the "training" model you pay an upfront fee, and then trade the firm's capital, where you take no risk but also get <50% of the profit you generate. I can't really comment on the quality of the training but I assume it's nothing great. IMO anyone who is about to do this should seriously consider just trading a leveraged IB account instead, though I'm open to hearing arguments otherwise.

I advise anyone to just stay away from these. Sure you get more capital to trade with. Maybe 1 to 100 leverage and most brokers would give 6-1 leverage which is more than enough trading capital esp considering the amount they require. Unless, your wanna get a margin call and possibly lose your shirt in the process you shouldn't be risking more than 150% margin anyways.


Basically any firm that would take anyone and requires collateral or training costs have the same model in mind.

https://www.truthinadvertising.org/t...pital-pay-play (Perhaps, they'd back you up for 2 grand if you happen to make 500 million on their simulator.)


Been a long time poker player searching for prop firms or any sort of backing for a while now and mostly just given up on the idea...

There's nothing wrong with going to a bring your own capital firm. You just need to realize a couple things.

1. Getting leverage isn't going to make you a profitable trader, so if your not already profitable going prop isn't going to change that. No one is going to give you 100:1 its more in the neighborhood of 20-30 they don't want you to burn out that fast.
2. Avoid the shops that have "training fees".
3. Negotiate your rate down as much as you can.
4. If your in the US regulation now requires you to have a S7 or S56 to join a firm. There are some international firms that have popped up accepting US traders that don't require a license. Avoid these like the plague. I've heard nightmare stories that span not getting paid to trading on a demo.

I'm a little curious as to what's going on at the higher tier firms. As in the places that sound more prestigious than the BYOC firm I trade at. We are all trading strategies you can more or less trade in a retail account on a desktop in your home office.

Are these firms doing things that are less accessible? Ie making markets in derivatives, strategies that trade off of paid for order flow, or HFT low latency stuff, as opposed to plain vanilla manually trading US equities? The only mid-tier firm I really know about, made all their money by being very early in the ADR arbitrage game. They had access to many different foreign markets and were just able hit all sorts of miss priced liquidity.

So I just get the impression that these secretive top and mid tier firms aren't necessarily super smart, they just have these huge structural edges.

Good question. I really don't know. I've kind of asked the same question recently. If you came into a diverse fund that backs anything and had a simple but innovative idea, "trade X against Y" in a way that is very novel--no doubt they might say "nice idea, thanks, bye". what I'm working on, if it might ever go anywhere, I haven't yet tried to pitch. So I just don't know. The best I can say is two things:

1. my broker friend who did the best at that and has seen a lot of people change jobs and move up, or try to, says he hasn't really seen that kind of idea rip off. And his/our theory is that good backers think it's a better investment take the inventor of the idea who can develop it and has an intuition for it, than it would be to try to re-make it from minimal informatoin.

2. this is pretty obvious, but at least I have seen it in the field: pitches can tend to be pretty cagey. they can say what they intend to do in generic terms. say that they have 30 candidate stocks that fit their loosely described criteria. and only give one or two example stocks. I've seen pitches like this.

But I don't think you're generally going to be able to get anything like a patent or an NDA that says that if they take your pitch and do it themselves they have to owe you millions of dollars.

One extra point on firms that may be exploitative: especially if you are posting capital, there are a lot of ways they can gouge you. high transaction fees / clearing / commission. Charges for training or lessons, as mentioned by many. High charges for data and software and connectivity, even rent. (Yeah, these are actual costs that the firm and its member have to actually pay. But 1. they can be exaggerated and 2. at like top hedge funds, they don't bill you to learn. you work as an analyst, an assistant, a junior trader. you trial small steps up. if you're not a smashing success, you can stay a well paid analyst for some time. but you're not having bills piled on you for learning.)

the worst thing that may happen sometimes is that when you trade you are not even trading on an objective external market. they might be feeding you a bid-ask that is outside the nbbo and scalping you. I got the idea but am not sure that there are FX "trading" shops where you trade on their bid ask, and there is no exchange, and they are probably scalping you.

finally, I do agree that it is not necessarily and absolutely bad and exploitative to hvae to post capital. BUT--if you are posting capital (and don't have established performance) ask yourself if there is any reason to be confident you hvae a positive expectation. So I know of optoins market making firms that will back traders by multiplying what they post (with trader taking first loss). In this case (back before algos were everywhere), you have the bid-ask spread as an options market maker to base some plausible expectation of potential profits on. But if you are posting capital based on nothing but "good luck!", that's a lot more questionable. and in both cases, you have to scrutinize your fees and charges.

A lot of them primarily engage in market making, but there's many variants to providing liquidity. Some of it more heavily relies on microstructure tricks, other stuff more heavily on inventory management. Lots of supplementary alphas might get merged in or run standalone as tactical strategies, anticipating order flow, stat arb stuff. Definitely not accessible to most due to scale required. Razor thin margins.

Some of the futures and options shops in Chicago have some manual stuff but I think even they are trying to move to algo dev.

Re ADR arb guys, if it's who I think it is, pretty sure they got outcompeted in that trade by HFTs.

A little more on the good IP point: as far as getting in the door of a multistrategy fund goes, I think it's a lot easier for them to trial you than to try to reinvent your strategy from your pitch. What seems a little more dangerous to me is whether they can appropriate your ideas after you get in the door (and boot you). You would need to have it in your contract that they don't get your work product, including your new developments when you are working there. I think you'd also need to hide it--either use some systems that you take home, or keep stuff encrypted on their systems.

It's an obvious question and easy for the right person to answer. Maybe it's just the cost of being in teh business if you can't start your own fund from scratch. (and maybe it remains often more efficient to keep you running your idea than to try to replicate it. but I have seen simple arbs on screen markets on obscure products (kinds of commodity spreads) that get out of line--be copied by one employee from another, who then takes it to a new firm. Some amount of that is bound to happen.

Good post, I'll add a couple points:

1. It is a false dichotomy to draw a line between the "Top-Tier Firms" I mentioned and HFTs-- and not saying this is what you're doing here, but just want to be clear. HFT (or, "Flash Boys" stuff) is a huge part of a lot of these firms' business model. They use engineering advantages to get to arbitrages before anyone else can, then use the profits from these arbitrages to invest more in engineering, and the cycle continues. Here's a good example of a project DRW has recently been working on: http://www.wsj.com/articles/high-spe...wer-1451937343

2. Another big part of the business model is block trades. Say a fundamental investor (Bridgewater?) wants to sell 25k Treasury futures. This is tough to do on the electronic exchange without freaking out the market, so instead, they can work directly with a prop trading firm to take the trade-- at a favorable price to the Prop Trader, but one which is still probably better than trying to trade on the open market. The Prop Trader's main advantages here are, in roughly descending order, (1) They have the capital to pull off huge trades, (2) They have the connections to get a look at most of these block trades, and (3) They have the traders/infrastructure/market knowledge in place to quickly and cheaply hedge their position.

3. The Top Tier firms probably still have about 10-20% legacy old school traders who are still in front of a screen clicking buttons. Most of these guys have burnt out but not all yet.

Yeah for sure. To be sure, this is what I was most worried about when I mentioned IP protection. You're right -- maybe this is just the cost of doing business when you're looking to get capital behind an idea.

The term HFT gets thrown around quite loosely, but I think it's reasonable to say that every top-tier trading firm is an HFT firm. Every single one has strong technology infrastructure. FPGAs, wifi, yada yada. I wouldn't go quite so far as saying that top-tier firms win on speed and infra alone. There are a few trades that do (ES-SPY arb), but the landscape has changed a lot in the last 10 years. Having smart alpha makes a big difference. I also wouldn't say that block trades are a huge part of the business model. KCG and Citadel might be active here, but most of the others are not.

I've been talking on and off this year with a BYOC firm. As I mentioned before, it's kind of unclear to me what the advantages of joining might be, when compared to trading my own proprietary Interactive Brokers account. FWIW I'm a systematic trader but currently execute manually.

Anyone else faced this decision? Comments on advantages of each?

For me personally, the value my BYOC firm adds are leverage, tech/trade support, and I get to trade near other successful traders. But for a lot of guys here, the advantages are marginal. Trading with other traders is invaluable. You get to meet a lot of people and learn from what they do.

For people that just do their own thing, it's a close call

How much capital are people generally bringing in to start, and how much would you think you'd need personally to give this a shot?

If you're a profitable trader, and by that I don't mean 12% a year or such nonsense, just trade on your own and build your account. If you're not profitable, then you might be able to learn at a prop firm. Chances are that costs will be high until you get your account to a reasonable size though.

A lot of people show up with 5-10k and the odds are against them, but that's just part of trading. Plenty of people have recently taken $10k to six figures and made a career out of it, even recently. Traders coming from other firms are coming in with 50k-100k or more. I've seen a guy come in with $1m

Trading around other people is very valuable, even if you are already profitable.

The biggest benefit if you have a small account is being over the $25k threshold so you can daytrade.

I have approx. 70k saved up, I think the bolded is what i'd really be looking for but I don't know exactly how much that's worth. Do they provide you with the technology and trading software? I'm torn because I have a decent corporate finance job but i'm miserable here. It's probably not worth it but if i don't try i'll never know. I have not been profitable, but i've only really started taking it seriously this year. Family/Friends are obviously advising against it.

Where I am, they "provide" software but obviously I'm paying for it. Yeah all in trading is probably not worth it since the success rates are so low, but if you can get it to work it can be great.

IMO you have to work with other people in some form or another. Get a feel for what people are doing in a trading office. I've heard guys say they came firms where no one really made any money, or from firms where people think you're baller if you put up $10k in a day. You want to be somewhere that has many profitable traders, where people are trading more than 300 share lots.

Just be aware that there are a few of these "arcade" style shops where no one is really trading any size or making any money.