More than 100% of my profit’s are from market making. Overall, I lose money on my positions. For the firm as a whole, position trading might be slightly profitable.
I have a basic strategy that works, and I run a couple variants on that strategy on a decent number of products. I am always trying to tweak the strategy to make it better, and add more products to trade. I also put some effort into developing new ideas. Most of the time, new ideas are a waste of time. There just aren’t that many fundamentally different strategies that work, and that provide the kind of risk/return profile that works in my industry. I know it is a cliche that you learn more from failure than from success, but in developing trading strategies I think the opposite is true. You can spend forever trying things that don’t work. Its much more valuable to understand and refine an idea that basically works.
Thanks for the response. This is exactly why I tell everyone who thinks they should dabble in trading to stop it. The regular person who thinks they can beat the stock market for alpha has huge odds stacked against them.
Real professionals that work at true proprietary trading firms:
Are not paying stupid amounts of money on retail commission.
Have direct access to exchanges via having a seat at the exchange, no middle broker.
Are using true HFT (not just automated trading ) with collocated servers at these exchanges.
Market making for tiny tiny spreads—it’s how most trading outfits make their money, not on positional trades, (real data is hard to come by but anecdotal evidence is abundant on this)
Since you are the expert, is my assessment mostly accurate?
I think you are correct about what prop trading firms do, but I am not so pessimistic about the prognosis for retail investors. I don’t think retail investors can compete with professional prop traders at what they do, but I think that they can do better than just sticking their money in index funds, at least on a risk adjusted basis.
Prop trading—understood as extracting money out of financial markets—is very diverse. Some people care about milliseconds and build their own microwave links between New York (actually, New Jersey :-D) and Chicago. They make millions of trades per day and make a tiny fraction of a cent on each trade. Some people care about long-term value, trade a few times a year and hold their positions for years. Some people do arbitrage. Some people do distressed investing. Some people do convertibles, or M&A, or IPOs. Some people make macro bets. Some people do something else in the markets. All of them are “real professionals”.
The type of prop firms you are describing are really just back office pools or trading arcades. Say I am a broker-dealer and I have a business that attracts chumps to deposit money with me, and I will allow them to trade through me, and all the traders can share expenses like office space and other services. The burn out rate is really high. Notice that this supposed “prop firm” is making most of its money on commissions from their own traders! and not actually realizing gains from their trading employees. Contrast this to a division in an investment bank that hires actual employees as programmers and quants, and their profits are determined by trading. I’m not saying all prop firms are just back office pools, but I know for a fact that a lot of them are. So maybe we just have different meanings for what is a prop trader and prop firm.
Since this is an AMA, let’s just ask jobe. Do you trade your own capital or 100% firm capital? Jobe can very well be working at a prop shop like I described and I’m not putting him down if he is. It’s just a known fact that most prop shop in Chicago or New York are of the scam-ish type.
Contrast Bright trading, the most well known and probably the biggest “prop firm” in Chicago to Jane Street. The former is nothing more than a glorified back office under the banner of proprietary trading where traders put up their own money, the latter is my definition of REAL prop firm.
Do you trade your own capital or 100% firm capital?
I trade 100% firm capital, not my own. I’ve heard of bright and places like that but there are lots of real prop trading firms, that actually make their money from trading. Here are some I can think of off the top of my head:
The type of prop firms you are describing are really just back office pools or trading arcades.
Actually, no, the type of prop firms I am describing are typically small (in terms of personnel, not in terms of AUM) hedge funds which run some manager’s own money and some outside money.
Facilities for day traders are a different thing entirely and I don’t talk about them here.
I guess we are talking about two different things then, I have never heard of any one talk about the term prop firm in your sense. Doesn’t make it wrong though.
Edit: If you are describing a small hedge fund that manages the managers money and outside money, then its just a hedge fund any way you cut it. Proprietary means only the firms capital is used, and for no clients.
And how does that matter for the original point under discussion—whether someone outside of an investment bank or a big hedge fund family (e.g. Blackrock) can successfully extract money out of financial markets?
If someone actually has a working strategy, he typically doesn’t just trade it, he starts a small hedge fund.
Because the original point under discussion was contrasting prop trading in the context of a real prop firm vs an outsider engaging in prop trading, and the advantages afforded to the former.
Anyway, I already know your position regarding whether an outsider can successfully extract money out of the financial markets and you know mine.
Curious, what do you do if you don’t mind me asking? I’m asking because you do know a lot about this topic, even though we disagree on somethings.
How much of your firms profits are from providing a market (giving liquidity) vs actually taking an outright position in the market?
Are there new strategies being developed constantly or is there just tweaks to an overall proprietary algorithm?
More than 100% of my profit’s are from market making. Overall, I lose money on my positions. For the firm as a whole, position trading might be slightly profitable.
I have a basic strategy that works, and I run a couple variants on that strategy on a decent number of products. I am always trying to tweak the strategy to make it better, and add more products to trade. I also put some effort into developing new ideas. Most of the time, new ideas are a waste of time. There just aren’t that many fundamentally different strategies that work, and that provide the kind of risk/return profile that works in my industry. I know it is a cliche that you learn more from failure than from success, but in developing trading strategies I think the opposite is true. You can spend forever trying things that don’t work. Its much more valuable to understand and refine an idea that basically works.
Thanks for the response. This is exactly why I tell everyone who thinks they should dabble in trading to stop it. The regular person who thinks they can beat the stock market for alpha has huge odds stacked against them.
Real professionals that work at true proprietary trading firms:
Are not paying stupid amounts of money on retail commission.
Have direct access to exchanges via having a seat at the exchange, no middle broker.
Are using true HFT (not just automated trading ) with collocated servers at these exchanges.
Market making for tiny tiny spreads—it’s how most trading outfits make their money, not on positional trades, (real data is hard to come by but anecdotal evidence is abundant on this)
Since you are the expert, is my assessment mostly accurate?
I think you are correct about what prop trading firms do, but I am not so pessimistic about the prognosis for retail investors. I don’t think retail investors can compete with professional prop traders at what they do, but I think that they can do better than just sticking their money in index funds, at least on a risk adjusted basis.
No, it is not.
Prop trading—understood as extracting money out of financial markets—is very diverse. Some people care about milliseconds and build their own microwave links between New York (actually, New Jersey :-D) and Chicago. They make millions of trades per day and make a tiny fraction of a cent on each trade. Some people care about long-term value, trade a few times a year and hold their positions for years. Some people do arbitrage. Some people do distressed investing. Some people do convertibles, or M&A, or IPOs. Some people make macro bets. Some people do something else in the markets. All of them are “real professionals”.
The type of prop firms you are describing are really just back office pools or trading arcades. Say I am a broker-dealer and I have a business that attracts chumps to deposit money with me, and I will allow them to trade through me, and all the traders can share expenses like office space and other services. The burn out rate is really high. Notice that this supposed “prop firm” is making most of its money on commissions from their own traders! and not actually realizing gains from their trading employees. Contrast this to a division in an investment bank that hires actual employees as programmers and quants, and their profits are determined by trading. I’m not saying all prop firms are just back office pools, but I know for a fact that a lot of them are. So maybe we just have different meanings for what is a prop trader and prop firm.
http://traderfeed.blogspot.com/2008/07/proprietary-trading-firms-arcades-and.html
Since this is an AMA, let’s just ask jobe. Do you trade your own capital or 100% firm capital? Jobe can very well be working at a prop shop like I described and I’m not putting him down if he is. It’s just a known fact that most prop shop in Chicago or New York are of the scam-ish type.
Contrast Bright trading, the most well known and probably the biggest “prop firm” in Chicago to Jane Street. The former is nothing more than a glorified back office under the banner of proprietary trading where traders put up their own money, the latter is my definition of REAL prop firm.
http://www.elitetrader.com/vb/showthread.php?t=276210
Again no offense to jobe if he works for the former type of prop firm.
I trade 100% firm capital, not my own. I’ve heard of bright and places like that but there are lots of real prop trading firms, that actually make their money from trading. Here are some I can think of off the top of my head:
Getco
Virtu
DRW
Allston
Ronin
HTG
Chopper
Sun
Optiver
Tower Research
Teza
Wolverine
Marquette Partners
Jump
Eagle 7
Peak 6
etc.
Actually, no, the type of prop firms I am describing are typically small (in terms of personnel, not in terms of AUM) hedge funds which run some manager’s own money and some outside money.
Facilities for day traders are a different thing entirely and I don’t talk about them here.
I guess we are talking about two different things then, I have never heard of any one talk about the term prop firm in your sense. Doesn’t make it wrong though.
Edit: If you are describing a small hedge fund that manages the managers money and outside money, then its just a hedge fund any way you cut it. Proprietary means only the firms capital is used, and for no clients.
And how does that matter for the original point under discussion—whether someone outside of an investment bank or a big hedge fund family (e.g. Blackrock) can successfully extract money out of financial markets?
If someone actually has a working strategy, he typically doesn’t just trade it, he starts a small hedge fund.
Because the original point under discussion was contrasting prop trading in the context of a real prop firm vs an outsider engaging in prop trading, and the advantages afforded to the former.
Anyway, I already know your position regarding whether an outsider can successfully extract money out of the financial markets and you know mine.
Curious, what do you do if you don’t mind me asking? I’m asking because you do know a lot about this topic, even though we disagree on somethings.
An “average joe” in the US has the IQ a bit below 100 and does not have a decent chance at great many things in life.
Now, whether a high-IQ guy has a decent chance is a different question, and an interesting one, too.
Sorry I was in the middle of editing what I wanted to say and you responded too quickly.
So what you responded to may have changed.