What Brokers do Prop Trading Firms use?

Hi,

Anyone has insights into the question?

My honest opinion is that Prop Trading Firms use the broker that they make the most money with, and certainly not the broker who is most suited to their prop traders style/styles of trading.

I spent twelve months out of the last two years wasting ten thousand dollars with a prop trading firm who insisted we trade through their brokerage. Unfortunately, the style of trading I wanted to do relied on reasonable spreads. And of course, the prop trading firm inflated their spreads to add to their overall profit margins.

One more learning experience for me, and hopefully my last. I feel that after nearly a decade in this trading game I have finally come to understand the route to trading success :-) And it has nothing to do with partnering with prop firms, that's for sure ;-)

Erron Adams

http://www.traderslog.com/proprietarytradingfirms/

*grumbles*

We need context before anyone can even come close to answering that question properly.

For starters: which market? Broker setups will be affected greatly by this.

And at least answer which business model you're referring to as "prop"?

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I'm going to assume you mean in Forex.. (to save myself a crud-tonne of writing since the structures of props in the equities market is where the interesting relationships and business structures happen.... would take a solid page or two to detail.)

And by 'business model' you mean the firms you see advertising their services around the net (maverick fx, or basement-dwelling fly-by-night shop fx .com) (I'm going to get some hate mail from some people for this post, I know it. )

There aren't many prop firms that only focus on forex. There's simply adequate leverage available to retail traders, and transaction costs are already low on retail side of brokerages for a trader to see an advantage to trading at a prop vs on their own.

This makes it hard for props to hire good talent (good talent knows this already,) or retain new talent who have become profitable (new talent learns they can trade on their own for a better profit split, better conditions and promptly leaves.)

So most forex "prop" firms don't bother trying to offer a better execution / data / fee / leverage setup to traders, since they can't really compete there. Instead, they often just partner with a broker (usually retail level) and try to justify their existence with complimenting services, such as training, coaching, market squawk box streams, teaching a method by the head trader, etc.... basically providing support services for traders who want to be guided and managed as traders.

But there's the thing, the prop firm isn't making enough revenue from your account turning volume, and if there's a profit split, they can't guarantee they'll be able to keep the lights on and pay for all the services they provide if non of their traders turn a profit in a given month... so they often charge a "membership fee", "desk fee", "education fee", etc.. and make it required to trade with them.

I actually see no problem with this up front, that is, providing complimenting services for a fee + profit split.. since some traders really benefit from such an environment (they need hand holding, no shame in admitting it, some just work better with a manager breathing down their neck and a plan in black and white they need to follow.) However, my issue is that most firms will do this while shifting the risk to the trader, and make the trader put up their own capital to trade with. They call it a "risk deposit" but it's really just the trader using their own capital (remember, leverage is ample.)

Why does that matter? The firm no longer cares what's good for the trader (like firing someone who clearly isn't going to work out, or developing a trader who has the chance to really make bank for the firm) and instead only cares about bringing on as many clients as possible and not give a crap if they profit or burn out.. In effect, they become one big value added introducing broker/agent for a retail brokerage. Their business interests are no longer aligned with making individual traders successful, since it's more profitable for them to put their efforts into marketing and promotion.

In other words, DECENT prop firms don't advertise (especially on craigslist.) If a firm is mass advertising their goal is to get fresh meat in the grinder and turn the handle, not develop traders or share in a trader's success.

Outside of all this, as I mentioned these firm are usually making money from the volume you do... on the backend they'll have a volume rebate agreement and act as both a corporate entity and introducing agent with their broker of choice. Just in case you were wondering why you're forced to use only one platform and broker through the firm.

These models are akin to the broker-dealer prop models you can find in equities... though I'd say they are usually a worse deal overall on the forex side.

/rant


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Oh right, who do they use? I've seen 2 firms use F_CM's Active Trader platform, which isn't the best for pricing but F_CM is good on providing these firms backend income on the volume they do.

4xprop.com would be one example of this.

Maverick FX uses Interactive Brokers.

IB has an "agency markup" option on their trade group subaccounts where they can increase the transaction costs and bank that difference for their managed accounts.. heck, IB has a division that caters to "trade groups" like props and offers a lot of the tools needed to manage them from the back-office point of view:
http://institutions.interactivebroke..._entity%3Dinst
(Forgive me if this link breaks later, if it does, you want to go to the "institutions" tab at the top of their home page, then find "prop groups" on the menu from the left.)

I have no clue if Maverick uses this markup to gain income from transaction volume of their clients, though it would fit the trend if they did.

(if you couldn't tell, I rather dislike the state of the FX prop industry... or really the lack of decent options within forex when it comes to straight prop, since the only business models that survive and make money for the firm are at the expense of the trader and aren't traditional "props" like we see in other markets.)



Disclaimer: My experience is with equity firms that trade in a proprietary fashion.. I've only been at firms (and currently with a private firm) with no risk deposits, who are selective on who they invest their time and effort into hiring and training (training isn't a profit center for them like the prop firms you see advertising online, a junior employee is trained at the firm's time and expense since the firm wants to make money from their performance later on,) and only profits when their traders profit.. in fact, it's impossible for me to be in a position where money flows from me back to the firm... since I'm not a client and not paying for any services of theirs... I'm a trader on their floor. They'll also tend to fire traders who aren't performing. They also doesn't need to advertise, since they aren't selling anything... and spend more time batting off desperate traders wanting a free ride than than hiring new ones. Keep that in mind when you look up prop firms in general, if they are trying to 'sell you' on the firm's services, there's a reason for it.

I'm not trying to sound snobbish, I'm just explaining where my point of view comes from. Some traders do really well at broker-dealers (the firms where you put up risk capital and pay for services,) and there's a place for them in the greater market for sure. I only sound like I'm against them since I rather dislike how many noobies they burn and turn through without care since it's their easy way to make a buck.

Lastly,

Since prop models (at least the ones I consider decent) don't fit well in the forex market... what's actually more common for traders who want to go institutional is the capital allocation model:

Traders remain independent. They get a few regulatory certifications (in the US, often this means being a CTA.) And they work with firms that place investor's capital with money managers.

They usually get the majority of a 2/20 split, like a hedge fund. 2% MER plus 20% of profits past high watermark. Often this is split down the middle with the capital introduction agent... and as you gain a better and better track record, you can command a better split for yourself (think of it like this, the less the capital introduction agent has to "sell" your services, the more they'll be willing to part with... if your track record and AUM sells itself, they'll take less of a cut. Til then, you need them more than they need you, so you'll bend over at only get 1 and 10. )

Of course people don't just drop AUM on traders at random, this is really only a route for someone who has a clear and consistent track record (usually audited by a 3rd party accounting firm, not just a myfxbook page.) It's a slow built business, but it's the way to go if an independent trader wants a shot at institutional capital in the forex arena.


EDIT:

Places that run this kinda model (that work with FX traders in the spot market):

http://www.mercenarytrader.com/

These guys will help you setup a legal entity like a hedge fund. Later, if your fund is doing well, they'll even take up capital introduction services and direct investors capital at you.

http://www.rapacapintro.com

These guys are new and have a few million to allocate traders... they don't deal too much with the corporate structure side of it (like, sure you'll need to setup a legal entity like a hedge fund LLC, but they don't focus on making money from advising you on that..) instead they just look at capital allocation to trading talent.


In both cases, you are working with the broker of your choice, since you're an independent and setup a corporate account at the broker you want to trade with.


There's a lot more companies out there that do this kinda service.. but these two are off the top of my head. Heck, some brokers even do this if they have the right business relationships in place.

Pepperstone has a capital introduction program for instance...

Again, this is for established traders with decent track records, and most capital allocation services see right through the high risk trading and tricks people do on signal service sites to gain "investors". This is a serious business, where a 20% drawdown on an account is a disaster, and you'll be reviewed for risky trading if you're making 100%+ (corporate world isn't stupid, if you're doubling your capital, your either lucky, trading stupid risk that hasn't harmed the account yet, or exploiting a valid edge and creating true alpha.. they are going to make damn sure you're in that last category, so some high flying trader with huge returns is looked at with the same risk microscope as someone who blows away 20% of an account.)

http://i.imgur.com/GAd0jgh.png


>,<

Blast my fast typing and ranting nature. . . :/

Capitalism 101

Awesome reply, Jack! Yes I was referring to FX Prop Firms. I wanna have a good idea of the more reliable FX Brokers out there. And I got more than I bargained for.

No problem.

Just keep in mind that the needs of a trading firm are going to be very different than that of an individual trader. So focus on what features would be a good fit for 'you'..

I mean, a firm might pick one broker over another for better capital efficiency, ability to clear through a specific prime broker or bank, or back office report generation by the broker to offload this work from firm managers.

As an individual, so long as the broker has decent service uptime, deals with you fairly and politely as a customer, and is well regulated (so you have a 3rd party to address should anything go wrong,) then you're set and can pick and choose the finer details that matter to your own preference as a trader to narrow down your selection. For instance, some people don't mind paying a much wider spread if they get access to tools and software that would otherwise cost them quite a bit to acquire on their own. Others might only want great execution and tight spreads and want the broker to get out of their way otherwise (no frills, etc..) This stuff depends on you.

That's true. Retail and Prop trading firms have very different requirements from a broker.

I'm using Oanda in Singapore. Their spread is relatively good. However, what scares me is their slippage and widening of spread during high vol. I've been using alot of limit orders to trade so I wanna ensure I get a broker with min. slippage.

Just another question - Since you've been trading in an equities prop trading firm, any idea about the FX Prop firms?

I had a prop acc where you pay to join - trade through demo mode until you start making consistent profits at which time they give a live acc and share profits. The problem was , I paid ten thousand to join YTR and within a month they went broke and stopped operating. Didn't get one cent back. My understanding is that they'll use who ever they can get a good deal from that will support their set up.

Oh, didn't see this before.

Idea about FX props?

The ones I've seen are either more of a service provider (ie, maverick fx) where they make most of their income from charging for training or monthly fees for squawk box services or trading rooms (online chat rooms with one head trader leading the group in a live market.) Usually people have to shell out $2-400 a month for the privilege of joining these firms. I just don't see the value in it myself, since the type of trader who is worth backing with company dollars is also the type who doesn't need training and stays the hell away from trading chat rooms or other "experts" opinion. They are independent and successful for a reason after all. (Also keep in mind, despite paying all this for services and having them manage you, you're still the one putting up risk capital.. so you're the first person to lose if you get hit, not them, and they take ~40% of your profits.

Of course, that's how most props have to act in the FX market, since they can't make much money on just a profit split alone... it gets back to that retention of talent problem I mentioned earlier. A trader can find 100:1 (or much greater) leverage at a retail broker with the same transaction fees and keep 100% of their profits... which would make them much better compensated considering they are on the hook for full losses at a prop or on their own.

I also think if a trader can't have the discipline to mange themselves as an independent, then that needs to be worked on first, and going to a prop firm to pay for someone else to manage you isn't the answer.

Things get better at some other places... like 4xprop, from what I understand (talked to them years ago, no idea if this is still the case now) they don't have the monthly fees or require the trader to pay for training, but they do require that you do a 'try out' period where you risk your own capital under their IB referral to F_CM Active Trader group to prove yourself first. So they target experienced traders, not just anyone who can give a credit card number and pay for a service. Still though, their model gets closer to capital allocation models that I mentioned before and if you're going to go that route, why not go with a capital allocation provider who lets you retain 100% control over your trading business?

All that being said, I'm viewing this from my perspective as a trader who doesn't "need" a boss over my head in FX, and is looking for a deal that makes sense from a monetary perspective.

There might be an argument for the 'training fee' and 'trading room costs' of firms like MaverickFX for compete n00b traders who want to ramp up quickly and cut through the noise of all the bad advice found on forums (and yes, sadly this forum is very full of bad advice.) But as much as I can justify that kinda setup working for one type of trader, my mind goes back to this "If someone doesn't have the analytic skills to learn, research, and develop their own trading style from the ample free material online, then maybe they got to work on that first and signing up to a service isn't the answer."

Don't mind my rambling.


Seriously speaking, if you're really intent on the prop world, look up props that specialize in futures trading. Quite a few of them will have currency futures desks, and there are a lot of strategies that props love which simply don't apply to spot given the difference between the markets (spreads, spread all the things, spreads everywhere, calendar spreads, cross market spreads, arb spreads, stat arb spread... etc..) That's still an industry where firms are more likely to back you and there isn't as much of a problem retaining talent, so it's worth it for the firm to invest more time into traders without needing them to pay silly training fees.

Christ... that doesn't sound like they had their shit together. Really sad to hear that, especially since the managers taking your 10k probably knew full well the place was bust.

That's one of the huge risks with deposit based firms, it's not a trading account, it's a company, so you have no protection of the funds you put in.

More legit firms who operate a deposit, or capital contribution model, will add one layer of protection in place. Instead of 'paying' them, they sell you class B shares of their LLC, you'd have no voting rights, but you'd be a 'partner' and see the health of the company, while making sure your capital contribution is used to cover clearing of trading operations, not keep the lights on. This is one of the better ways of doing capital contribution / deposit props.. and a few run like this in the equities world.. think MaverickFX (the example I gave in this thread) does it as well.

That's not an endorsement of capital contribution style firms. Ultimately the safest route is where you are never in a position to pay your firm anything, and money only flows from them to you for your services. Of course, finding places like that are hard, and you usually have to start with 3+ year audited track records and build up a capital reserve of your profits with the firm before you can take any gains out. (I know a few futures prop firms that make you keep the first ~$35k you make in a reserve account at the firm to cover any sever drawdowns you have later. Makes things hard for someone just starting out, but not a bad deal if you're not putting up your own cash.)

Thanks for your reply!

That's very true. The answer to successfully trading definitely isn't going to a prop firm and paying someone to manage you. Although I do know 1 such trader who made it this way with Propex (futures trading). He started off semi-consistent, but with full time trading and coaching, he improved and managed to be pretty consistent. But it does make sense if the prop firm gives the trader a significant amount to trade, thus giving him access to the funds that he ordinarily wouldn't have as a private trader. Having said that though, it will take a while for the trader to earn that credit with the prop firm, given that risk limits and trading cap will increase with consistency and capability.

I haven tried futures before, therefore I'm not sure how my strategies will work in a completely different market.

You mentioned that you're currently full time in an equities prop firm? Is it based in the states?

Futures are a different animal, but the currency futures are closely related to the spot prices they are derived from, so it's easy to pick up...

About work.. it's more of a small private firm than a 'prop' in the same sense we've been talking about here. To be honest, lately I've been pushed way past my comfort level by random people online asking about my work (between getting PMs asking for info on my firm, to emails by others with their resume asking for a "break".. really...), so nothing personal but I'm going to start being more reserved about what I disclose about it.

It's not in the US, I'm in Toronto. I'm also fully backed by them.

Yeah from what I know about futures prop trading, its mostly scalping.
Sure, you don't have to share about your work