Category Archives: Prop Trading

Is it worth joining prop trading firm as a day trader?

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Yes.  Trading today is no different than when Jesse Livermore traded stocks in the “bucket shops” of the early 1900’s.  He was able to beat them consistently even though they had every advantage.  He was able to out think them.  It can still be done today.

The most important aspect of trading is to understand that trading is all in your head.  It is not in the markets.  Your “playing field” is not your computer screen or chart, these are merely tools for you to accomplish the task.  Your “playing field” is your mind.  That is where the game is won or lost.  Most traders play “checkers” when the traders you are trading against are playing “chess” and are 3-4 moves ahead of your thinking.  If you want to beat them you need to start playing chess.

There are bots and algorithms in all trading now.  The human mind can out think any robot or bot they can build.

Can I break into prop trading with no formal background?

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Trading with your own money is one of the least effective ways to enter the trading space professionally at a hedge fund or a large bank, especially for quantitative trading.

There is a lot of selection bias.  Suppose that I am a manager who is looking to hire traders and you are someone who traded from home and made money for three years.  Well, I have hundreds of resumes that land on my desk each month.  By luck, there will be dozens of resumes each month that will have a track record as good as yours or better.

If I based my decision on just performance alone, I’d pick the highest Sharpe ratio traders that apply.  This is not the right strategy for me to follow, to be clear, but if I did, because of the large universe of applicants and selection bias, the people I’d pick would have something like 4 or 5 losing weeks a year (over the time they reported returns).  Even if you know what you’re doing, it’s very unlikely that you can produce that kind of return through skill alone.  This isn’t how I should pick traders because then I am just reacting to noise and luck, not skill.

So that’s why hiring managers at hedge funds and banks use other signals.  They look at things like, which traders did you work with before — can they get a reference from someone they know is good?  What other achievements, ones that aren’t as subject to luck, do you have?  (Someone who is World Champion in Rubik’s Cube or a past NFL player may have a better shot at getting into a hedge fund — quant in the first case, non-quant in the second case, that just someone who has traded from home.)

With all that said, if you have a strategy with positive EV to your best judgment and aren’t restricted from trading it, you should be trading it.  But you need to have a stronger resume than that to get a position within a top hedge fund or bank.

What are the strategies of prop trading firms?

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Proprietary trading firms pursue a massive variety of strategies. As others have mentioned the only thing that defines a prop trading firm is that they use their own capital to trade. After working inside these firms it is clear that some of them are extremely open to any kind of new strategies as long as they will make money (in the end of the day this is the goal). Sometimes these could be relatively ordinary strategies like market making, but other times it could be strange relative value trades in illiquid products or even spot markets in commodities. I have heard of proprietary trading companies getting into everything from sports betting to cryptocurrencies. Other more generic strategies I have heard of or witnessed in prop:

-Market making in options markets (extremely common)

-Fixed income arbitrage

-Convertible bond arbitrage

-Various kinds of relative value trading (algorithmic or otherwise)

-Discretionary views on underlying

-Volatility arbitrage

-High frequency news event trades

What do I need to do if I want to become a prop trader?

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Another way to ask this question is what do I need to do if I want to become a professional football player?

Anybody can become a ball player, but to become a great player, you must have lots of training, talent, discipline, courage and perseverance. Same goes for prop trading except that you will also need capital.

Here is the path I recommend:

  1. Study and find your trading style. Prop can be stressful and many suffer from anxiety.
  2. Start only with capital you can afford to lose.
  3. Pick a firm that can train you.
  4. Pick a firm that has profitable traders.
  5. Find a mentor that can teach you or show you how to make money.
  6. Get proper tools. Trading platforms, trading journal software, fast computer and internet.
  7. Work relentlessly. Study before, during and after market. If you are not dreaming about the markets, you are not studying hard enough.
  8. Help your trading buddies. You will also need help to endure the tough times.
  9. Open your mind about trading strategies and instruments and study them. Markets change and this exercise will keep your eyes open.
  10. Build mental toughness. Create a trading challenge once in a while that pushes you. Mine was holding a 10k share position.
  11. Have a long term plan. Prop can burn you out very quickly if you don’t have a balanced lifestyle.

You can see how well I did during my first few months as a prop trader here

What is a day in the life of a prop trader like?

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Where I worked, we had a pretty hectic schedule at the start when we were in the internship phase commonly doing 12 hour days. This was generally the time where the weaker or struggling people got weeded out of the program. Once passed & live, our day looked some what different as we could come and go as we pleased once we hit targets. But generally speaking, our day looked like this for the first 6 months of trading live money. ( All times London time) We focused on futures markets usually.

7–9am : Arrive in to trade the European Open, usually the Dax, Eurostoxx, Cac, Ftse or a spread trade of merging 2 markets together.

9–10:30: We could trade the bond market like the bund if there was any early news announcements out that day.

10:30–13:00: Hit the gym, catch up on sleep, whatever tickles your fancy really as the markets were usually quiet for us during this time.

13:10–14:30 : We traded the pit open of oil or if there was any news out or geopolitical events, we’d go where the volatility took us.

14:30–16:30: We traded the US open, mainly indexes. This was our “important zone” that would usually determine if the risk desk would let us trade bigger size on the day depending on how much money we made up to that point. If we were down near our allowable daily loss, risk would usually cut our size or force us to stop trading at 16:30 to avoid compounding the problem.

16:30–18:00 : Do as you please, get food, relax, whatever you needed to do to get refocused & like I said if you were near your daily loss limit, your day might end at 16:30.

18:00–19:00 : we’d get ready and trade sugar settlement which usually brought volatility into that market. We may also have trade Cotton or Cocoa futures too depending on where the action was. We always needed volatility for what we were doing. ( Cotton was always so illiquid so you can imagine how stressful that could be sometimes )

19:30- 21:00: Trade the US close if there was volatility. This was discretionary as it could be super quiet or if you had a good day, you might not want to push it.

This is how my day looked like around 2010–2012. On Fridays, you could also add in on our free time at 10:30 – 13:00, we’d have performance reviews where 6 of us would go into a room and present our performance to the head traders and talk them through our thought process. This was usually just for the first 6 months though of trading live money. After that, the time table changed and we had more freedom to trade as we wished as long as we were obviously making money.

I remember some traders literally only trading 2 hours and making plenty of money but to get to that level, we had to experience all the different markets in the above timetable for the first 6 months. Keep in mind that this timetable was applicable to us around 2010 & times of opens/ settlements may have changed since then. Hope that helps

What is prop trading?

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Proprietary trading can be better described by first looking into the role of a trader in an investment bank.

Using a large reputable investment bank as an example, it would have 4 to 5 traders covering U.S. interest rates products (Treasuries, agency debentures, etc).

These traders are there to make markets for their clients, but they also have their own positions and are allowed to use their balance sheet for such purposes.  In that regard, they are like asset managers with market-making responsibilities.

Now, proprietary trading is purely using one’s balance sheet to make money for the firm (the traders are rewarded based on the pnl).  The prop traders don’t offer any client services, and they exist solely as a risk taking group in the bank.

Just to reiterate, both client facing traders and prop traders have their own risk positions, but one is doing it “on the side” on top of what they do to make markets, but it is the full time job for the other.