What prop traders need to know

Not all trading firms are created equal, however. Here are a few things to look
for when considering affiliation with a firm:

1) Will you be trading your capital or the firm’s money? Your payout (share of
profits earned) should be significantly higher if you’re taking all the risk.
Conversely, don’t expect firms to take 100% of the risk by fronting you money
unless they also can recoup losses by taking a decent share of profits.

2) Are fees reasonable? Firms provide you not only with software, hardware, and
fast connections to exchanges; they also maintain and upgrade the technology.
Fees cover that, as well as your physical overhead (rent) and office support.
Make sure you compare apples to apples: some fees look low, but higher
commissions add to the overhead. You need to compare total overhead to total
overhead to see which firms are offering relative value.

3) Is the firm a learning organization? When markets change, to paraphrase
Churchill, traders who don’t hang together will hang separately. Some firms
encourage sharing of information, research, and insight among traders; at other
firms, traders jealously guard their “edge”. Access to other traders is a major
benefit of affiliation with a firm, but it won’t do you any good if traders
don’t work together and trust each other.

4) Is the firm breaking new ground? The best firms support traders with new,
proprietary trading tools and market research. Automated trading tools, trading
systems, advanced screening tools: these are becoming standard. You want to
affiliate with a firm that is constantly innovating. Ask yourself: Where is the
firm’s edge? If the firm isn’t constantly developing and extending its edge,
it’s hard to see how it can contribute to your success.

5) Is the firm devoted to training and development? At the best firms, senior
traders mentor junior ones. Training programs bring new traders up to speed, and
mentors keep traders on a learning path. There is a continuous feedback of
results to each trader and emphasis upon setting and reaching of goals. If each
trader is on his or her own to learn the markets, the odds of success are much
lower than if senior traders are incentivized to help junior ones. Beware firms
in which established traders have no meaningful financial stake in the success
of junior ones.