I'm Trying to get into Prop-Trading From a Non-Target School

Warning Long Post Ahead

Hello WallStreetOasis,
I am a recent graduate of Hofstra University with a bachelors of science in mathematical finance 3.4 GPA trying to get into prop trading even though I am aware that all odds are against me. This is my first post in WSO and it is going to be a long one. Hopefully, at least one person can help me out because I really need it.

Little bit about myself
I am 22 years old graduated college recently May 2017. Originally started off as a finance major like every other business student because I knew I wanted to get into business but didn't exactly know what I wanted to do. As a result, choose finance right? Because it seems pretty 'safe'. It wasn't until sophomore year I decided to switch to a more quantitative major (mathematical finance) because I found a lot of curiosity in automated trading involving algorithms. With this new curiosity, I researched more about trading and began to trade equities and eventually equity options on a small personal account to learn. I had some success but many more failures and ended up losing all my money (but definitely learned a lot... the hard way). I felt defeated after losing all my money several times which sparked my interest in algo trading even more; I wanted to learn how to code my way into profit because all my failed trades were mainly due to human emotion. But the thing is I only learned VBA during my college career and to my understanding, it isn't very useful for prop trading.

What I Know About Prop Trading
Let me tell you what I do know about the industry from my own research and please correct any misinformation.

First thing is I believe there are three distinct categories of trading: proprietary trading, hedge fund trading, and IB sales & trading.

Prop trading is when a firm is trading for themselves for profit. In other words, they have no clients that deposit money for the firm to trade. These prop shops provide capital and leverage to their traders. I am not too sure how the compensation model works in 2017 for most prop shops because I know that it has changed since 2008 crisis. In terms of strategy, one way prop shops can make money is by trading in smaller markets because of the fact that they generally have less capital than hedgefunds or IBs. By entering smaller markets, the prop shop may perhaps be the biggest market-maker in the specific market or at the least, have strong market-making influence which, in either case, gives them an advantage to make profit. However, I do understand that market-making and prop trading is not the same thing; market-making profits off bid-ask spread and prop trading profits off betting.

Hedge fund traders on the other hand trade capital pooled by private clients. In terms of strategies, there are various that exist within hedge fund trading but I believe they tend to be more directional oriented rather than market-making (ex: longing or shorting positions in hopes that in the future the bet was correct for crazy profits).

IB sales & trading, like hedge fund trading, generally involves more capital than prop shops. Definitely more risk management-oriented than prop shops or hedge funds because IBs are inherently more conservative.

Why I Want to Get Into Prop Trading instead of Hedge Fund or IB Sales & Trading
Well the obvious reason is because coming from Hofstra a non-target with a 3.4 GPA there's no way I would get into the latter two. But still, I think prop trading is becoming increasingly more difficult to break into because they are hiring from top schools similar to hedge funds and investment banks. The other big reason I decided on prop trading is because trading is a true passion for me. Yea I know. You hear that from everyone that wants to get into trading. But after researching various different industries of finance that I might be interested in such as equity research, consulting, public relations, and investment banking, I seriously thought about each one of the different industries and came to a conclusion I would be miserable if I ended up in any of them because all of them are not something I truly enjoy.

My Questions Regarding Proprietary Trading
1. Is this still a viable industry to get into today? Where is the direction of prop trading going?
2. With my background how do I break into a prop firm?
3. Is it possible to break into prop trading with no coding background with the rise of algorithmic and quantitative trading?
4. Should I learn Python or C++?
5. Are there any prop firms that would even consider taking me in to train (not hire) as a recent college grad with my background?
6. Can you explain the Volker rule and how it affected prop trading as a whole and also how it affected the compensation model of most prop firms after it went into effect or is it something that more so affected BB proprietary divisions rather than private prop firms?
7. What are prop trading interviews like? Are they similar to IB trading interviews? How should one go about preparing for one?
8. What do prop recruiters look for in a potential trader that makes him or her stand out from the rest?
9. Which prop firms are the most respected and profitable?
10. Which prop firms are the ones most likely to take up recent college grads to train?

  1. Lastly, I have a list of prop shops (in no particular order) that I am familiar with that I believe are respected and well-known and hopefully one day be working for them (please let me know if this is a good list or if I should add or remove any firms):
    Susquehanna, Wolverine, PEAK6, Avatar Securities, Optiver, Jane Street, Archelon Group, Alliston, Getco, Spot Trading, First New York Securities, Bear Capital Partners, Belvedere Trading, Chicago Trading Company, Chimera

Also which 'prop shops' should I avoid such as T3 Trading? I heard to stay away from prop shops that require you to put down your own money? I believe most prop traders frown upon such firms like T3? Could you guys elaborate why they are not 'legitimate' and other firms to avoid that are similar?

Anyways, if you read up to this point I really appreciate your time and would be love any feedback, comments or advice even if you want to tell me I won't make it or stop wasting my time. But comments like those make me want it even more. People want things that they are told they cannot have. I want to get into prop trading more than anything. I've been jobless since May after I graduated and I've been applying and networking 24/7 since then with no luck but I understand a big factor is because of my background but hell, I will work for free or even be a janitor for a prop firm just to get my damn foot in the door. Yes, I sound desperate but when you are starving for days with no food the ONLY thing you want is food and I am fucking dying of hunger to get into this damn field.

 

The people I know working in prop trading are all proficient in some coding language (mostly Python), and have been trained in competitive mathematics from a young age. This typically takes the form of a target school graduate with a high GPA in a quantitative field, with work experience that could include academic research or software development/data science.

Truth is, given your background and stats, you will be at a significant disadvantage when it comes time to recruit. Generally, prop trading firms will administer math tests to screen candidates initially (with a very significant failure rate), focused around mental math and problem solving. Advancing past this initial screen will typically result in quantitative interviews of ever-increasing difficulty, until finally you're presented with mental math exercises that are more typical of hardcore national math competitions around probability and statistics.

You've also forgotten a bunch of high profile prop trading firms from your list: DRW, KCG (which used to be Getco), DE Shaw, Citadel Securities, Jump Trading, etc. Typically, people who aim for prop shop jobs also aim for quant hedge funds (DE Shaw, Two Sigma, Rentech if you're willing to get a PhD, Citadel, AQR, etc.)

If you are completely and absolutely serious about pursuing this career path, you should consider going into a graduate program in mathematics and working in a more academic setting. I've also seen people jump into the field from software development backgrounds, although those people tend to be more code monkeys than traders.

 
Best Response

2 things right off the top

1) you are mistaken...hedge funds are often in the same class as "prop trading" firms. The 3 types of trading are really:

(a) HFT market makers (b) medium term (intraday) day-trading (lots of hedge funds in this category, as well as most prop firms) (c) institutional positioning (this includes some long/short hedge funds, as well as larger outright funds like pension funds, mutual funds, insurance companies, central banks). Trades are large in block size, but not very often. (d) S&T (investment bank market makers)

S&T are market makers...just like HFT firms (and they try to manipulate markets in the process of making markets and providing liquidity, just like the HFT firms do...but that's harder to do at their size and scale...dirty little secret)....they mostly make markets for larger blocks to the institutions from category (c) but they also take short term prop positions sometimes, tho they are mostly required to exit those positions by the end of the day...so they fall into both buckets (a) and (b).

So, first you need to decide which if the 4 categories you want to go into.

(a) HFT is all math and programming...its more of an engineering role...but with a markets twist. (b) is what most people think of when they talk about prop trading...equal amounts art and science (c) requires pedigree...years of experience at an investment bank usually...sometimes also an MBA (d) has a formal way in (summer internships) and a backdoor (internal recruiting, usually from technology/quant/research groups)

All 4 categories are hard...very hard..to get into the real "decision making" roles where you can make real money...lots of competition at every level. Since you don't have any experience, and you don't yet know "how to make money" in any kind of consistent way....its a bit of a crapshoot. However, there is a way to overcome that obstacle...you need to learn (yes....i know...duh). Either you need to be taught in some kind of semi-formal process (usually an internship followed by junior role on a trading desk where a senior trader takes you under their wing and teaches you)...or you need to backdoor your way in (technology or some kind of junior analyst).

The easiest way in (assuming you can't get an internship) is a job in trading technology or operations. Understand, this will not be a "trading" role...but it will get your foot in the door...and give you the opportunity to learn from the inside...and you'll be getting paid to do so. Quant roles will require Masters or PhD education in math/tech. These are lucrative, stable, and well paying careers (because it takes so long to accumulate the necessary knowledge to get in)...but this is not for everybody...takes YEARS to learn the math.

It sounds like, from what you wrote, that you just want a prop trading firm (like Gelber or the other mostly chicago based firms) to just give you a shot...but you also know that rarely works out...its competitive, and it is their money...they don't want to risk letting you lose it without a good reason. So you need a way in. They have internships (that you should apply to)....but they are also very competitive.

My advice...try to get an internship (everywhere)...and if that fails, try to get a technology job that you can handle (tech jobs are plentiful...just look at the job boards like Indeed to find the skills in demand...maybe learn whatever programming skills are listed for the jbs you want and think you are qualified for). I know plenty of people who started out in a tech job that had some kind of connection to trading and capital markets...who took the initiative to learn more skills, then got a different job with an even closer connection to trading (usually after 1-2 years...during which time they learned everything they could) and THEN get a shot as some kind of junior analyst on a trading desk, where they had the opportunity to really learn how to become a trader. This is a long road...probably 5 years if you really backdoor your way in (but at least you get paid to learn).

The other faster backdoor route (Masters in Financial Engineering + Programming classes) is probably faster....but you take economic risk. Only go this route if you can get into a top 10-20 program...otherwise you might not be able to get a job in your ideal company.

 

your goal is to lateral to an entry level trading/research desk analyst position. Regardless of how good you get at Product Controller...you will learn nothing, absolutely ZERO, about trading in that role. "Trading" means "taking risk decisions"...it has almost nothing to do with calculating "value." Its all about judging the emotion of the market...and its very hard to quantify. However, all is not lost. You will be employed at a major bank. That means you have access to industry education. Choose a market (equities, interest rates, commodities, etc..) and then

1) learn everything about that market and the securities that trade within...and everything about the underlying things that make up those securities (pricing, liquidity, derivatives, complex structures, fair value, different behavior of different market participants, etc..) 2) learn everything you can about risk management (hedging) of different instruments in that market 3) learn all the math and programming that you would need to be skilled in #2

4) after all that (probably at least 2-3 years) you should be qualified with the knowledge for a junior analyst role, either on a trading desk, or more likely, on a quant / research desk.

Quant Research desks are breeding grounds for the trading desks. Many quant researchers get promoted to trader / portfolio manager. However, NEVER have i seen or heard of a product controller (thats a fancy work for accountant in the ibanks) getting a position directly onto a trading desk. You will need "something else." This is partially a personality issue, and partially a self selection issue. Why did you choose Product Control (accounting) over IT, or getting more intense math education so that you could become a real quant ? Usually its because you had a low tolerance for risk, and Product Control is a "low risk" job. Trading is a "high risk" job...and they want people with "high risk" personalities (to an extent) because if you can't stomach taking risk, then you'll be frozen and paralyzed like a deer in headlights when they throw you into the deep end (that's what trading feels like when you don't know what you are doing...and this can last for years)

Without knowing you, its hard to give accurate advice, but use this as a starting point.

 

English is the only useful language I am fluent in. But I am working on improving my French.

As for programming languages I have programmed in C/C++ and VBA. Though I think there are much better programmers out there with a greater amount of passion for coding.

"The markets are always changing , and they are always the same."
 

yes, futures are a great place to learn...no, 1000 EUR is not enough money to trade with...50k is the minimum i would suggest, and that has got to be money that you are OK with losing (its called risk capital)...so i suggest you paper trade with a mock account of something like 100k or 1 million. Raw notional amount doesn't matter as much (because what really matters is % gain/loss)...but to learn how to trade takes on avg 10,000 hours of active screen time (yes, that's about 5 years @ 40 hours per week..8 hours a day). If you are a genius, lets say you can cut that down to 2 years.

It takes a long time (years) to understand pattern recognition (news, value, flow, technical price patterns, volume, positioning, etc...)...and that's assuming that you have a teacher who knows what they are talking about...there are no shortcuts to that.

 

There are 2 aspects to trading 1) product knowledge 2) trading knowledge

so, first you need to choose a product....and must start with one thing. For example, lets say you choose interest rates...which you narrow down to canadian interest rate swaps...or maybe you choose crude oil. These are 2 very different products, and each will have very different fundamental things that you will need to learn. It takes YEARS just to learn everything there is to know about the product...both on the macro and micro scale. THEN, after you are knowledgeable about the product, then you need to learn "how to decide if price should go up or down" and that itself takes years to learn.

During a summer internship, you will learn a little about (1) Product...there is just no way to learn anything about (2) "how to trade" during that short time frame (many junior to mid-level people you might work under during an internship are themselves still figuring out (2). So, the summer internship within S&T is just a very long interview where you learn something about some products. They are trying to figure out if you will be able to learn...will you fit in...those kinds of things...because hiring an recent grad takes years of teaching before you will be able to really "add value" back to the firm.

Because of this, you should focus on the basics first.

Bond Math (price to yield, duration, convexity, time value of money, how to hedge a position and the drawbacks/strengths of different hedge choices)

Option Math (derive black scholes...calc the greeks...understand the greeks...calc the net greeks for a portfolio of options...for example with front CL trading 50.75, long 3x 51 strike calls on 1 month crude oil future vs short 5x 52 strike calls on 2 month crude oil futures, given current market prices what is the net delta, gamma, theta, vega, of that position...and if crude oil rallies 50 cents, recalc the greeks, and determine the best hedge to immunize against a further 50 cent rally in crude oil futures during the next 2 weeks...you could do the same in interest rates)

This is just basic background knowledge. If you don't understand the above paragraph, then you have something to go study.

If however you go into interest rates, maybe mortgages, or credit structured products...then there is a whole other level of bond and option math to learn...will take years to learn it all and understand how to put it all together (some people get a masters in financial engineering to learn this stuff...and that is still just scratching the surface)

Lets say you get a degree in financial engineering and you learn all the technical stuff from above. That still doesn't tell you, should you buy or sell right here, right now. So now you need to learn "how does my market trade...what makes prices go up and down?" This will take you another couple years to learn...because there is no book...its all trapped in the heads of experienced traders...so you will learn thru experience and time. There are things like technical analysis, and back-testing of technical strategies that you will need to go thru...and then things like reactions to different kinds of news in different environments...the only way to learn this stuff is thru experience. So learn macro economics, political science, math, engineering, tax law....you will need to learn all these things, plus you need to know what has the market been doing recently (what kind of leveraged position are out there right now) before you will be able to predict, with accuracy, should i buy or sell right here, right now. Trading (profitably) is a lifelong process of learning...there is no short road....and no guarantee of success.

Some people read this, and will think "ehh...not for me"...other people will read this and say "where can i sign up?"

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