Well, the end of the year is coming soon and I've been doing a lot of planning for 2010 as we get closer to the new year. One thing on the agenda is to get more serious about my trading and take it up to the next level. I've looked into and considered several different options to obtain my goal and now I've settled on trading with a proprietary (prop.) trading firm. While prop. trading, I will still run my law practice on the side for a little while, I at least have to wrap up several cases, but then I will be looking to shut down the practice for good if the trading continues to go well.
I've had to do quite a bit of research to find out what prop. trading is all about. The good news is that there are several options for traders today who are interested in making the transition from being an amateur part-time to a full-time professional trader, as many firms now offer remote trading opportunities so you can trade from home. The bad news is that there are some not very reputable prop. firms out there and these guys tend to give prop. firms in general a bad wrap. I figured that I would provide a post and break down some of my findings and observations about prop. firms for those interested.
First, prop. firms can be separated into firms that require a capital contribution (risk deposit) and those that don't. The ones that do not require a risk deposit generally require you to take and pay for a training class ($3,000-5,000 is the typical price) or you must provide them with a professional and profitable trading record. From what I hear, some of them will still demand that you take the class unless you have a pretty good record. One benefit of trading with a firm that does not require a risk deposit (even though you pay for the training) is that this circumvents the SEC rule that requires a series 55 and 63 license in order to trade professionally.
Okay, so they charge you for a class...then what? Well they usually have a training period that lasts anywhere from several weeks to 6 months and then there is generally an amount that you have to make within the training period or at some point at the end and if you make this amount (which is often very low) then you can start trading firm capital. At this point, you begin trading a set amount ($50,000-$100,000) with a set risk limit (a daily loss limit) and the firm charges you commissions, software/seat fees, and they take a cut of your profits. Some firms allow you to keep up to 90% of profits and others can be as low as 50%, it just depends on the firm and the arrangement that you have with them. Sometimes it's possible and more profitable to give over a greater share of your profits in order to get lower commissions...this would be beneficial for scalpers.
The ones that require a training course and not a capital contribution are what I'll call Group 1 prop. firms. These are better suited for those that are either new to trading, don't have a professional track record, or feel that the training would be beneficial. The plus side to these firms is that they provide you training, mentorship, and they have an interest in seeing you make money because they want to earn money from you. The cons are that you usually have to take a class, they can be very restrictive on your risk limits and trading style, and it can take a while before you're up to the level where you can earn a living from trading the firm's capital. There are also a few firms that are less reputable and some in particular that are associated with some big names (that will not be mentioned here) that charge a big fee for the training and they have a reputation for not developing many profitable traders. Doing due diligence on prop. firms is essential as donig business in this area of the trading world is defineitly what we call "caveat emptor" or "buyer beware."
Examples of some of the better (note that better is only my opinion from my research...do your own DD) Group 1 firms are
SMB Capital,
Keystone Trading Group and
Pro Trading Course. As I said above, Group 1 is more beneficial to those that are not already or have never been professional traders, but they would probably be very frustating to those who are already professional and can earn a consistent living due to the restrictive nature of the firms.
As for the firms that require the risk deposit, I'll call these Group 2 and these can range from firms that just require a deposit and let you start trading to ones that provide more services and training. Examples of these types of firms are
Think or Swim or
Cy Group. The benefit of these firms is that they provide you with the tools, leverage and direct market access that is often (but not always) required in order to trade for a living. Group 2 is ideal for those with professoinal experience trading and they generally offer discount to trading groups as well. As you can imagine, they are not as well suited to most non-professionals because a lot of them do not offer the intense training and mentorship that Group 1 provides, but some do offer more than others, you just have to do some due diligence.
The downside to some of these groups, but not all and not the ones listed above, is that some require you to trade a certain amount of volume because they make their money by charging you commissions. Now the commission part itself is not bad, because they usually offer lower commissions than are available at the retail level, its the pressure or requirement to trade a certain amount of volume that is not good. These are "churn and burn" outfits and they don't have much interest in seeing traders stay profitable, they just want their money from you and then they'll move on to others.
So there you have it...what else could you need to know...anything? Yes! This post has barely brushed the surface and anyone interested in pursuing the prop. trading path has to do much more research and DD. What kind of research and DD should one do? Start by contacting the firm, looking at the firm's websites and blogs, ask the firm for references and contact these people that have traded with the firm, read forums to see what's being said about them (although take what is said in forums with a grain of salt), and even visit the firm in person if possible.
Here are a few links to some helpful resources:
As for me, I've decided to go with the Group 1 option and get the intese training and mentorship. I feel that this will be beneficial because I've never traded for a living, just on the side, and I've never felt pressured to consistently draw a living out of the market as I have a law practice that provides that. The live mentorship alone will probably be worth the money. I'll probably begin in January or February of 2010, which is just a couple of months away now. I haven't quite narrowed it down to a specific firm yet, but I think I have an idea of which one I'll go with...I post on that at a later time.
I hope this post is helpful to anyone considering proprietary trading. Please feel free to comment or email me if you have anything to add. I'll post some updates once I have more to say.
Have a great weekend!
TLT
Despite the smoothness in the indexes, one trade that I put on today failed to do much of anything...it rallied at the opening and then petered out. In fact, it didn't even get stopped out, it just sat flat. This can be frustrating on a day when the S&P is up 2.3% but I guess that happens every now and again. Just have to do my prep work for tomorrow and try again. 
