Can someone please point me in the right damn direction!?

Hey everyone,

I am an undergraduate student in RI (3.9, Dual concentration: Finance & Applied Statistics), prior to that I was a paratrooper in the NG and did some full time work for them. I only recently discovered prop trading and need some guidance. My understanding is very superficial but I am very interested to learn more. I got sick of the approach of finding careers that offered high pay and high mobility, then trying to tailor myself to that. Instead, I recently sat down and mapped out what my "dream job" would be and researched. BOOM! Prop trading! Before I get to excited though I have one problem

I don't know shit about the fine details. Like who hires, who do they hire, something about paying them to let me work there, what strategies do they use, do you specialize like in I-banking, etc.

A lot of the easier stuff is available on google, I get that. I am more talking about really understanding the field.

I asked a few professor but they don't have any experience in it. I was hoping someone here could either give me the run down or link me up with a good source to gain exposure and learn about the field. Preferably both

Thanks in advance

 
Best Response

Okay, I'll try to help.

Before we start, it's important to know that prop trading is probably not what you think. At all. Everybody wants to be, and thinks they are fit, to be what is essentially known as a daytrader. Somebody who makes their own schedule, makes amazing returns from the markets, works from home, answers to nobody, etc.

Which is, of course, pretty much everybody's ideal job. Except that basic economics tells us that if it were that easy, it wouldn't make any money. If it made that much money, it would be extremely difficult.

This business model, this image, it doesn't exist. Very very few people are able to do it that way, and they are simply exceptions to a fairly strong rule. You don't make your own hours - the market opens every day when it does, and you can't be performing your research and actively trading, which pretty much means any reputable trader going it alone will be working AT LEAST 10 hours a day AT BEST. If not 12,14+. At least 5 days a week.

Now, let's talk about what prop trading is:

  1. "Arcades": these are shops that require you to put up your own capital. They provide computers, software, datafeeds, and cheap execution for professional traders, and will sometimes help you leverage up your capital. They are meant for experienced professionals to provide a good workplace for them. Anything else, anything where you pay to have them train you, is not good training. Would you have paid the NG to train you? No. If it was good enough training that actually added value, they'd make their money back many times over from your trading. Think about that.

  2. HFT / Algorithmic: this is a fairly niche space. It focuses on hiring very quantitative people to program and design ultra fast algorithms to make pennies, or fractions of pennies, in a single trade, and repeat that many many many times over. Many PhD's in Computer Science, Mathematics, and Statistics here. They hire out of some undergrad programs but generally still more like the U Chicago, Harvard, Princeton, Stanford quant UG majors. These shops include GETCO, Jane Street, maybe Optiver? I think? I'm not an expert on this. Tower Hill I think, some others. Hopefully others can fill this in.

  3. Market Making: some overlap here with the HFT shops depending on the company, but many times these guys are simply making markets for a product, usually derivatives. For example, it seems like the "Big 3" here are the three with 3 letters, so CTC (Chicago Trading Company), DRW (DRW Trading), and SIG (Susquehanna International Group). Although again, don't take my word on that and hopefully somebody can and will correct me if I'm wrong. These guys still prefer more quantitative majors, but will take Finance / Econ types more frequently than say an HFT shop. Their job is to calculate a theoretical value for a product, and offer to buy OR sell (and they don't know which until the customer decides) a product. Say they believe a highly traded option is worth $100. They will offer to buy that option from somebody at $99.95, or sell it at $100.05. This spread can change, especially in terms of magnitude, but the general idea is that they are providing a service for customers that allows customers to trade at any given time, and their profit will be that spread over time.

  4. Discretionary: it seems like this might be what you're looking for, but I think there's very few left. To my understanding things got pretty hard for them with the rise of the HFT/algo shops. Check out First New York Securities, Trillium Trading, and maybe Millenium (although I think they only want pro's and they might technically be a hedge fund). The reputable ones will offer to train you and provide a small salary while doing so, after that it's just a percentage of your profits.

Hopefully that helped, let me know if you have any other questions.

 

First of all, thank you for your help. I know its probably remedial and a chore for you but its invaluable to me.

I wasn't naive enough to believe I could just show up and become a big time trader within a year and make zillions of dollars from my ridiculous returns. I am under the impression that a prop trader arrives at the office at about 630ish to get up to speed before the markets open, do some research, have a meeting maybe, then trade til 5, and then do close up and do some more research to leave around 6ish. I'm on board with working 60+ hours a week as long as I get most of them done in the morning. I'm getting married in a few months and she would kill me if I got home at 8 - 9 pm every night and left at 5 the next day.

I like(or think I like) prop trading because you can get your work done early in the morning and still have a life(I was on the I-banking train for awhile), my performance can be directly traced to me and ill be compensated based on it (puts me in the drivers seat), and I don't have to worry about clients pulling their money out and screwing up my strategy.

I also want to be able to take calculated and educated risks that can have high returns without someone tearing my head off for doing it. Obviously if it busts I'm screwed anywhere but if I work in PWM i'd probably get fired even if it paid off. I interned in PWM last summer, it sucked, it was boring as all hell.

How far off am I? Give it to me straight, I have VERY thick skin.

So I guess my next question is, do these firms hire undergrads or take UG interns? I'd really like to see about intern opps since that's the best way to look under their dress and see what's really going on, so to speak. I have a good GPA but I don't go to an ivy (Bryant University) so I am pretty sure I'll be fighting an uphill battle. That's okay with me. Worst they can do is tell me no. I like competitive environments anyways. Professions are only competitive if they are actually worth doing and I'd like to do something worth doing. Plus and internship would allow me to see if I have what it takes to do it. I'd rather know I suck early on then find out 10 years later.

Lastly, how does prop trading differ from institutional sales and trading professions at large BB banks?

Thanks again

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.
 

I think as you're willing to be flexible in your strategy and whatnot until you reaallllly learn the markets, your products, and are truly a professional, you are somewhat on the right track. Many, if not all, of the firms I listed take UG summer interns, although if you do some searching on here, you'll see they are indeed very difficult. Your best bet, as always, is networking. Your schools alumni database, a well made LinkedIn profile, and a list of companies you are interested in goes a very long way sometimes. 90% is showing up, and networking is showing up. Going to other cities, meeting people, actually building relationships, getting to know these people and actually care about them, that's how this is done. Then you'll get the chance to interview somewhere.

Keep in mind, too, that "prop" trading simply means the firm is trading with it's own capital, versus outside money. Keep in mind, then, that most prop trading firms are smaller than you might imagine.

 

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