I have been working full time at a prop house for almost two years. I have enjoyed moderate success but expected much more by now. The company drills into you from day one that the way to make more money is to trade more (do more roundturns for the company) as they get rebates based on trader volume from exchanges and clearing houses. The strategy taught from day 1 is to literally market make in calendar spreads and pick up a tick with infinite down side (big blow outs are frequent). Staff turnover is high and trader morale is very low.
There is always a promise that you will earn big cash and people are making bonuses in the millions in other offices but it turns out this is all lies. There is no career progression and no incentives to develop new strategies (its actually discouraged). Of course, for the company it makes perfect sense but for the trader its actually one big scam. Desk fees, management fees, profit split, commissions means you take home about 20% of your earnings (if that). I'm doing about $15k in commissions a month with approx $5k in desk/management fees. Needing to make $20k a month to break even seems like a huge scam to me.
Are all prop houses the same?
In short, no. Churn and burn shops merely offer some basic services and technology to traders. They extract collateral and other fees to make sure their EV is positive even when young guys burn out. These are scams.
The good firms you hear about are well reputed specifically because they teach and practice solid risk management. Reputable firms such as DRW or Optiver do not require capital and themselves invest a lot into the training of new recruits while paying a decent salary. As such, it is in the firms' best interest in this case to not have trainees burn out.
I didn't have to put up any capital. The firm pays a monthly salary but that comes out of your year end bonus. All the guys who have been there for a while just talk about how much money they used to make and how little they are earning now.
Just out of curiosity is it on the level of Sig/Drw/Optiver or is it more like Wolverine/Transmarket/CTC/Peak6?
This is why you should stay away from prop shops which require you to put up capital, pay the fees, and wanting you to sign up for their 5k training program. Actually most of the prop trading groups are like these, trading arcades basically although they say they are a "proprietary trading firm". The other end of the industry is completely different: the quant firms which deal with HFT, market making, and arbitrage for instance. Not doing a bit of discretionary trading, they are the way to go.
Guys, the OP "is" at one those firms you describe. He is trading firm money and most likely is earning a draw (salary as you guys call it) plus his net. I almost dare to say it's probably even one of the firms you guys refer to as reputable. And yes, he is playing the role of a market maker. To answer the OP, it's not a scam, the market is awfully tough right now. Vol is low and most spread markets have become very efficient. When vol stays constant over long periods of time, markets move towards efficiency. When vol is highly variable, inefficiencies develop and trading opportunities present themselves.
In that case you clearly work in the worst prop house I can imagine. Find yourself a new job at a firm that earns some decent money. And most reputable firms still make good money today, maybe less than during a crisis but still decent.
It is very unusual (read: suspicious) to encourage trades that are good for the firm but bad for the traders.
A lot of prop traders speak fondly of the good ole financial crisis days, but if your firm is failing to make money now clearly it's not the place for you. CTC can still pay 1st year trading assistants salary upwards of 80k even though options vol has been stagnant for a good long while now.
So how does one determine if the "prop shop" you are looking at is a scam (unfair to the trader) or not?
You have to put up your own capital - they offer training for money - charging big fees so that you can have a place in their firm - you don't get a base
Doesn't sound like the best place for a broke, just graduated college grad... lol
The fees are bit ridiculous. 20% profit share is insane. I was getting 90% but that's because I had a track record, usually it's 70%. 5K is a rip off, I was paying $200 a month. Believe it or not, back in the days when prop trading was still in existence at the bulge brackets, prop traders had a desk fees too. Commission was generally $1 per 1000 shares for me depending the ECN.
I'm no expert but I think not one legit/prestigious prop trading firm would require you to distinctly pay a fee on anything.
You're paying to play somehow and it's part of the biz model... BBs charge desk fees, props charge commissions and HFs just flat give you a shitty cut (2 n 20).
Sounds like the trader is taking all the risk. Bad shop. Not all shops are like that.
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