Job Security at Prop Trading (Chicago Based)
I have traded for almost two decades in a bank. All those years have been successful. However a lot of the time there is a small income (20 percent of profit) derived from the franchise. Note that I have always made much more money than my franchise.
I have now been offered a job at a medium tier Chicago prop house. So I would expect that there is no franchise value.
The new job offer allows me $3m of margin and $1.5m stop loss
How stable is this job? If I make zero money then am I automatically out in the first year? What about if I make 500k, 1m etc am I out also?
Any ideas what job security measured in raw first year P&L i am expected to make is?
(I think my seat will cost 200k to the firm and I won't contribute capital or any other costs)
Probably nobody can say for sure because prop shops are so much different. Some prop shops are so much centered on CEOs who are good traders but bad managers, I've seen someone who's a pure liability to the firm(negative pnl, 0 skills) go on working with 100K+ salary while another who make decent money (500k-1m) get fired for mildly annoying one of the partners at company event.
With that said, judging from your margin/stoploss, if you ever hit your stoploss in the first two years, you'll be out for sure. But if you make a mild loss or net 0-500k, they'll spare you for a year or two to see how it goes. 500k-1m you'll be okay, 1m+ you'll be solid.
My advice is, play it safe in the first two years. Once you build solid relationship with partners, you'll get more room to risk. The risk tolerance is generally very subjective in those mid tier prop firms.
Thank you for the advice/info. My background has always been about working in a firm with a franchise.
I had thought that making 0-500 would be likely I am won't survive but Youur point about taking it relatively slowly is interesting.
Nasslemanace is right that I have never traded a " single"stock. My background is macro trader. I trade indices, commodities, FX and rates - both vanilla and exotic. So my only exposure to stock is through indices and not individual stocks in a BB.
I wil speak to the recruiter for advice before speaking to the partner.
I know I sound rather naive but when it comes to prop firms I am completely naive.
Another naive question: when do they expect you to start trading at a prop firm having just joined the firm. Should I rush into trading straight away to show what I can do or should I start to transition slowly back in? I have been taking a career break.
You look like you have never traded a single stock otherwise you wouldn't be here asking such dumb questions:
If I make zero money then am I automatically out in the first year? Discuss with your Employer. What about if I make 500k, 1m etc am I out also? Discuss with your Employer. Any ideas what job security measured in raw first year P&L i am expected to make is? Discuss with your Employer. How stable is this job? After discussing with your Employer as advised above, you will have a better idea.
I'm not a trader but this really wasn't a stupid question... no need to berate unnecessarily
TheBuellerBanker cool, please feel free, whether its you or the 6 other people who threw monkey shits to give ONE ANSWER to any one of his questions. Clearly those can only by answered by his EMPLOYER.
Certain things are better not discussed with your employer. If you think questions are naive, better not ask the partners at the firm.
In terms of your second question, I guess you'll know better when you're ready. But If you've been taking a break for awhile, I'd say take your time. IMO I don't think partners generally like the guys who are so eager to make money fast, because they are the ones who are the most risky. It would be better to show them your discreet side first before diving in so fast. This is because prop firm that doesn't require traders to put up risk capital has asymmetric risk-reward for traders: when traders make it big, they get rewarded big, but if they lose big time, they simply get fired. For this reason, partners will view you as one of those 'make big or go home' mentality guy if you jump in and be too eager.
Think of it like an investor in a hedge fund The 3mm of Margin is actual capital Investor expects a min 20% return on capital....thats 600k/year. 300k/year is only a 10% return - that is probably not enough return for a setup with the risk profile given. I'd guess that anything above 500k, you won't be "fired"...but with a 1.5mm stop loss, you are expected to make 1mm+/year.
Whats your payout economics? If you are putting up no capital, than i'm assuming 15-20% ?? Also, its a stretch that your "seat cost" is 200k/year...that seems high for a prop shop with more than a handfull of people (remember that those costs are spread out amongst several people) - i'd guess half that ~ 100k/year.
ironchef, Thank you. My seat is $200k because the base is >>$125k.
500k seems realistic and makes sense. I have always made in excess of $1.5m (last few years have averaged above $2m) but the franchise has been at least 20% (possibly 30% at a stretch) but it is so easy to make money when you have seed P&L. not having seed P&L makes it a lot more difficult imho and I have not been in this position before.
caeruleus, thanks for the advice.
The one piece of advice I would give it truly understand WHERE you derive your PnL from. Working at one of these shops I think the failure rate I have personally seen from bank guys crossing over is high around 80%+ with an N of around 20. A lot of guys have some easy money coming from internal edges that they could risk on other trades, there is no free lunch in prop. No more sales desk flow, no more intel/ internal research, different fees, margin and software systems. As someone else stated you might have $1.5MM down draw but know and try to minimize the variance of your PnL even if it's sub optimal but if you drop $300-$500k people will be asking questions and eventually your risk limits will be cut back so getting back to break even is much harder. Due to the profit structure try to get your bread and butter trading going and put some runs on the board even if it means not going for the highest EV+ trades in the meantime.
If you can last the first year and put up a decent amount (even under budget) you will find success in the future much easier and once you have credibility with the firm the risk tolerance does change. Will you be canned if you make $0 the first year? Hard to say, is that $0 after fees? Did you drop $400k first 6 months then finished flat? Was there a barrier early on that stopped you being successful that is changing? I think it would depend on how your business looks going forward from a fees, PnL variance/ capital intensity/ firm strategy point of view. My guess with your back ground is that you get another 6 months to show those changes.
thanks
The franchise I had is undoubtedly worth money but generally I do most of my own research and the trading ideas are mainly mine. I would say that I trade more in a bubble than not. However, if a Colleague has a good trading idea I have no qualms putting it on also (I have no idea how co-operative the new team would be but in the old firm we would share ideas and information reasonably readily - maybe prop traders don't co-operate and this I would miss a lot).
Now, although I have been out of the market I have traded pa in the last two years and have been way more successful than I expected. I say 90%-95% of my trades have been profitable but that has been quite easy in part to a rising stock market but my market timing has been really good. My return on margin would be way way in excess of 100% but the number of trades executed (around 40) probability suggests that the number is transaction is too low to be statistically significant.
I don't know, if I can survive two years then I am happy because at least it is the minimum amount of time to at least show you aren't a failure.
you mentioned "job security" in the top post - but at a prop shop, that term does not belong...there is minimal "job security". If you don't make your target (whatever their target is for you), you will be out.
Answer this - can you do what you do in a retail trading account (interactive brokers, or another similar setup)?
If not, what EXACTLY do you need, to do what you do? Specialized analytics? Custom spreader? Intermarket spreading that requires higher balance sheet than you have yourself? Products that require an ISDA (swaps, etc..)?
"Security" is not the right word to convey the threshold between being out and in. The more appropriate word is threshold What is the threshold I must cross to know I still have a job. I am not sure the firm knows what it is by examining the contract in front me (they give me leeway on the 1.5m usd. Hence I want to know from your experience that number is likely to be.
I think I can make money. Why think? Because two years ago that answer would be 100 percent yes I can make money with no franchise. But two years on markets change - Does trading ability have an out of date? Or do I need to relearn the markets again having been out?
All I need is access to a blooomberg and Reuters terminal. A decent news feed and a fast trading platform to execute. I think the firm can provide all of that.
He's right... I know the firm I'm about to mention isn't a Chicago firm, but this is still in basis related to prop trading.
https://www.thestreet.com/story/10978513/1/leading-traders-join-first-n…
Look at all of these people. Notable individuals at their respected desk joined prop firm. Hardly any of these people are still alive. I know people who works at this firm who joined right after college and are successful making 8 figures. I'm not going to mention any names here but... just because you're a trader from a bank doesn't mean you will make money.
Ditto.
I am mindful that trading without a franchise is very difficult - although I never had as wonderful a franchise as some of the guys you mentioned. Hence I give myself 50 percent probability of success (paying my seat). Slightly better than even. I am very respectful of the markets (having traded through every bubble and every financial crisis in the last few decades) and maybe this helps me as a trader.
Can you elaborate on what do you mean by "respectful of the markets" in detail? maybe this can help a lot of people as it is clearly one of what you consider your advantages I guess.
if the firm is thinking of the mindset, risk 1 to make 2, then your 1.5mm stop = 3mm expected P&L.
Just something to consider...
Think they are expecting me to make 3m but I don't think this is related to the safety threshold in the first year. Reading everyone's input the threshold seems to be around 500k, I think.
the 1.5mm stop loss is not common among junior people going to prop shops (is more like 50k)....that 1.5mm number is what a BB allows a junior trader on a flow rates desk to risk...but prop shops are a different beast. Most people on this board cannot really help you, as there is very little experience with the numbers you are talking about. For a guy with 20yrs trading, sure the numbers make sense...but this board is mostly college kids and 1st-3rd year analysts.
anyway...the biggest hurdle for you will be psychological. The first couple times you lose a big chunk (hey, it happens) lots of guys lose their nerve and never really engage the market again. You gotta be able to both a) step away when its not working and b) get back in there after a break and trust your system. This is one of the hardest parts of prop trading..because you CAN just sit there, watch the screens, and think "nope, not yet" forever.
a firm that gives a 1.5mm stop loss to new guys, most likely has well over 1bln in capital (so, not a standard prop shop)...3mm of margin is real money...but that can be leveraged 20-50x depending on your asset class...so that could be 100mm of balance sheet you get to play with. I imagine they have over 100 traders/teams given this kind of setup.
This almost sounds like a Millennium/Balyasny /Schoenfeld type setup (just, smaller numbers than what i've heard). The larger funds like these are shooting for 20%+ return on capital, while keeping risk under control. Margin $$ is real capital...so 20% return on margin= 600k at a minimum...but realistically, they are looking for multiples of your risk profile. Remember that lots of guys blow out of these firms, and so the winners have to also make up for the losers. Most guys going to these platforms would not be satisfied with those numbers. Also, consider payout. If you are putting up no capital, then most likely your payout economics are ~15% of profits. So, to make 150k for yourself, you need to make 1mm trading. I doubt you can afford your living expenses with anything under that.
Remember, 1mm/year = 4k/day avg. With the numbers you are talking about, you should be shooting for 20k/day (5mm/year rate) and be satisfied if you hit half that (2.5mm/year). At that rate, with a 1.5mm stop, risking 1 to make 2 (risk 10k to make 20k) you can have 150 losses before you are stopped. 150 losses is a LOT of losses (3 days a week, for an entire year))...assuming you are a semi-active trader...which is kindof the standard for "prop" trading.
If you are better than halfway decent in picking direction, and you have decent risk mgmt, then you should be setup to succeed with this platform. I'm kindof jealous.
i am actually quite confused at moment. i have an offer for a job that is extremely secure for $135k a year or should i risk a high basic pay trading job with no security but a much more skewed income distribution.
sit back and earn $135k or throw the dice and possibly earn a lot more. this is why i am trying to gauge job "security".
i have real estate investments that generate $150k a year before tax so i don't need a job (if i get fired) but it will hurt because i have kids in schooling.
if i have a three good years then it is equivalent to many years at this safe option.
seems obvious to me...take the 125k base + bonus trading gig if you have at least medium confidence in your trading ability.
There are many 135k jobs (seems like a non-trading position) for people with 20 years of experience working for a bank (the organizational knowledge is useful - risk, mgmt, compliance, etc..) as a fall back.
it sounds like somebody else (wife perhaps) who is highly risk averse is afraid you'll get let go from the trading gig and then have nothing, but remember that there are hundreds of non-trading positions that you can do as a fallback.
a 1.5mm stop with a decent % of PnL bonus payout is a traders dream, If you are a trader, then grab it with both hands. If you are not a trader, then this is a more difficult question. The risk vs reward skew still leans towards taking it (its like a lottery ticket with a 25% chance of paying off). If your odds are better than 50/50, then statistically, you take that bet EVERY time.
I would recommend staying with bank, but everyone has different priorities. For example I'm more on the conservative side, and I would prefer the stability, benefits, and network within the bank. In my experience, most prop shops have little to no regard for their employees and feel no loyalty in tough situations.
There are skills that make good traders and bad traders, but sometimes there are inexplicable moves in the market that can leave would in the red. If the prop shop kicks you to the curb, its tough to waltz into another job interview after being let go from your last firm due to your performance. But again, to each their own.
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