I learnt about this trading arcades in other forum and would like to share it here in the forum and invite others to give their views and experiences in this area.
Here are the details:
What is a trading arcade?
A trading arcade, proprietary trading group or trading bureaux are some of the commonly heard names for a company that provides risk management, additional leverage, professional software and hardware infrastructure, trading facilities with analyst support and sometimes training and capital backing to traders in return for a share of trading profits and/or commissions.
At an arcade, you would typically find a spacious trading room filled with desks: well equipped work area's with high spec workstations, arrays of screens and terminals providing access to market data & depth, quotes, charting, Reuters, Bloomberg, Sky TV and the all important trade execution platform. The name trading arcade probably originates from the fact that the rows of traders facing screens bears an amusing resemblance to a video game amusement arcade full of kids.
The origin of Arcades
With the rapid expansion of electronic trading and the demise of open outcry as many exchanges close their trading floors, a whole community of professional floor traders was on the street looking for a way to salvage their livelihood and duplicate some aspects of the floor trading environment. Many of these former locals formed their own trading firms as they made the transition to the screen trading. These trading firms came to be known as arcades, and since the majority of traders were former pit traders the definition of a local came to include pro screen traders at arcades.
While there is no precise data available on the share of futures trading that Arcades account for, the evidence suggests that it is significant volume. Euronext estimates that independent traders, its term for screen based locals, individuals and firms trading for their own accounts, make up about one-third of the entire universe of people trading on its Connect platform. Trading Technologies, the software vendor used by most local and professional traders claim to account for as much as 50% of the total futures volume traded around the globe.
Why trade with an Arcade?
There are numerous advantages which I will detail below:
- Commission Costs. A professional trader's biggest 'cost of doing business' is the commissions he pays. The primary advantage with arcade affiliated trading is the huge savings that can be made in the costs per roundtrip trade (roundtrip = an opened and closed trade). The total number of executed roundtrips at an arcade can easily number into the millions of trades monthly. The arcade as an entity therefore has huge buying power and can use this to negotiate ultra low commission rates with the clearing firm that a standalone trader could never expect to receive. As an example: A pro trader might easily execute well in excess of 50,000+ round-turns in a month and pay perhaps 60p per round-turn trade his total monthly commissions paid at that rate would equal £30,000.00. By contrast, a retail trader paying retail brokerage commissions at a company like TradeStation would pay $5 round-turn or approx £2.65 so the same quantity of roundtrips at this rate would add up to a whopping £132,500.00 of commission!! (as a further comparison, spreadbetting firm Finspreads are today quoting a spread of 1.00pts on the March S&P futures equivalent to an incredible $50.00 commission for an equivalent point value trade as the futures contract)
So for every 10p saved in commissions in this example makes an extra £5000.00 in savings/profits for the traders account. Competitive transaction costs are a large part of ensuring a trader succeeds when the trader is scalping from tiny inefficiencies in the market pricing. The arcade will provide additional volume breaks, usually on a sliding scale so that the more volume is traded, the cheaper his commissions will progressively be.
The arcade itself is a business in its own right, providing a service to traders, so the commission rate the arcade will pass to traders will typically include a margin for the arcade as a business. This is to be expected however, and the rate the trader receives will usually be highly competitive as you can see from the above example.
- Infrastructure: A commitment to full-time trading also requires a commitment to invest in the best hardware and software that are available. A trader needs every advantage in a fast moving market and with more traders competing against each other than ever before, you can't expect to be a competitive participant in today's electronic marketplace by using an outdated machine, unreliable software with inadequate screen space and a slow connection. As a result, the initial outlay costs associated with setting up a comfortable, reliable trading desk with access to the best hardware and tools can be very high. The ongoing costs of the best data feed, software subscriptions, maintenance and support can be higher still. The buying power of an arcade again comes into play: The high cost of infrastructure such as high quality workstation, multiple screens, datacenter, subscriptions to professional software such as CQG, TT X-Trader and Bloomberg Terminal, in-house computer technicians, multiple failsafe data lines and uninterruptible power backup can all be combined and work out extremely advantageously on an individual cost per trader basis.
The advantages of having the best hardware, software and support at prices unavailable to individual traders speak for themselves and provide the second biggest advantage for arcade trading.
- Support: Many arcades will run an Analyst desk where a market analyst(s) will provide live commentary and interpretation of news and fundamental data. Often these will have sources who can get news releases early and put out trade recommendations before major announcements. Additional backup comes in the form of onsite computer technicians & IT support who make sure you don’t have system problems, and can fix them quickly if you do.
- Environment: Clearly, working in a dynamic environment surrounded by other experienced traders is going to be beneficial to anyone serious about trading. Experienced traders can always give you tips if you are following an arcades in house methodology, and the atmosphere and buzz can help a lot with perpetuating that essential traders mindset. Offices are often a spacious, trendy, well equipped environment with trader comforts such as lounges, rest/sleep zones and playrooms with pool, arcade games and perhaps a sandwich bar.
What does all of the above cost?
The cost of renting a seat and using all of the associated services will vary greatly between arcades, depending on what services they include in your desk/office package. A typical monthly cost might range from under £1,000 for one exchange up to £2,500.00+ for five exchanges or more. For a retail trader or someone uninitiated to professional trading and the costs involved, this might sound expensive but when compared to what a pro trader would have to pay anyway just for using the same software alone, excluding all the hardware, the other support services and the office costs, these sort of costs are usually a very significant saving! As an all inclusive package, a competitively priced desk fee is always a great value deal for a professional trader.
An arcade generally does not make much, if any, money from the monthly desk fee these fee's cover the significant running costs and, if competitive, are not an earner for the company.
How does the profit split work at an Arcade?
Generally, if you as a trader make use of the arcade's additional leverage facilities, either to fund the full margin requirements for an overnight position or for your intraday activities then your agreement with the firm will include a pre-agreed share of trading profits for the arcade. This share will vary depending on the facilities you make use of, but it might be around 10-20% of end of month profits for the arcade.
If you are a fully self-funded trader and you do not use the firms capital, then a profit split does not apply, but if you do make use of the firms capital and put that capital at risk in your trading, then of course the arcade will be entitled to a return for its risk in making that facility available to you.
How does an arcade make its money?
The cost of running the office, providing the equipment, data and software services will be covered by the desk rental fee.
The main income stream will be via brokerage services where the arcade provides ultra-discounted commissions to the trader by means of its combined buying power, and includes a margin for the business in the final roundtrip cost.
Another source of income is via leverage and margining services where the firm will fund or part fund positions, and take a pre-agreed percentage of trade profits in return for its risk.
Lastly, Arcades will benefit from funding and training their own traders to trade the firms in-house methodology and capital.
What are liquidity provider rebates for Arcade traders?
Due to the huge amounts of volume an arcade will execute, the firm will be registered as a liquidity provider with the exchanges that it trades with. Individual traders can benefit from what the exchange calls liquidity provider rebates which is where the exchange refunds part of the exchange fees on a sliding scale based on how much volume or liquidity the trader provides to the markets.
These refunds start from around 5000 lots traded in a month. For a trader doing even average pro volume in a month, the rebate can add up to many thousands, or even tens of thousands of pounds that are credited back directly into the traders account.
Who would use an Arcade?
Trading arcades largely took over as the venue of choice for locals, brokers and professional traders where the exchange dealing floors in London left off when LIFFE closed the pits.
Most traders involved in trading professionally, for a living, or as a broker would find advantages in a trading association with an arcade. For new traders and those who wish to make a start in the trading industry, an arcade is an excellent place to learn many of the strategies used by the pro's and many arcades offer training and funding schemes for graduates.
Are all Arcade traders self employed?
As a majority rule, this is almost always yes, even if trading the firm's capital as a funded trader. Traders will usually be considered as external self employed consultants who make use of the arcade facilities for a fee. There are obvious tax advantages available for prudent traders in this arrangement when considering the sums of money involved.
What about Arcade training and graduate schemes for new traders?
Some Arcades will also train and fully fund a new trader using the firm's capital. Arcades will generally only accept graduates although there are no fixed rules in this regard.
The Arcade will have a particular approach to trading that they know works well and where they can precisely quantify the risk/reward to the business. The trader will undergo an extensive training period, typically lasting several weeks or months. This training will include learning the Arcade's in house techniques and practicing it on an execution simulator. When they can show consistent simulated profits, they will be funded and started on the market for real initially with small size but scaling up as they prove themselves profitable.
Training might take two or three months before live trading at which a new trader may not show consistent profits for six or nine months. He should anticipate being break even or profitable within the first year, and that being the case the second year should be a good year for both the trader and the arcade.
In return for providing the training, risk capital and either a basic wage, or a capped withdrawal from the firm funded account, the new trader will be expected to honour a contract to trade with the firm for two or three years. This way the Arcade can expect to recoup its losses in training the trader, funding his basic wage and trading capital plus cover his initial losses. The profit splits under a training and funding deal will generally be more like a 50/50 split, which for a trader who is being shown how to take consistent money from the market at no risk to his own money is a very good deal.
At the end of the contract, a trader can renegotiate his terms if he wishes to continue trading the firms capital or he may have enough money in the bank to trade as a self funded trader if he wishes to risk his own money.
Demand for these funded trader positions is always high, Arcades have great difficulty selecting from the hundreds of applicants for each new position.
What trading methods do Arcade traders employ?
Professional traders will usually either be directional scalpers or spread traders (nothing to do with spreadbet). Generally, both approaches will be trading large size often for just single ticks by trading off both sides of the bid/ask in the same or different markets.
Spreading is a type of arbitrage approach where the trader is both long and short two similar or correlated markets at the same time. This type of trading qualifies for large margin breaks from the exchanges due to the more limited risk of these positions, so a spread trader can be working orders of 100 contracts for perhaps the same margin as would be required for an outright directional long or short position with just 10 contracts
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