Prop Trading - how much money do they give you to trade?

typically at a prop firm...you have risk limits. for example, a prop firm might limit a junior trader to 1k loss per day. If you lose 1 thousand dollars in a day, you are stopped out for the day. This severely limits the kind of positions you can take on. Maybe its 2k, or 3k? But you get the idea. After a string of losses, you will get fired. Other firms might have a yearly stop risk limit. Lose 50k and you are fired. At a hedge fund like Millenium, they give you 100mm of capital, then if you lose 10mm, you are fired.

Given these risk limits, what size position can you carry? The prop firms have enough capital to support any trader taking a larger position...but the risk limits will preclude you from actually doing that...until you make enough money to provide a cushion for losses. After you make 100k....then you can use that entire 100k as a loss cushion...but that 100k is also where you get paid from...and if you lose it, then you don't get paid. So, you essentially fund your own losses...and the prop firms only want to help get you started...with the thinking that good traders will be self funding. If you aren't a good trader...why would they want you trading with their money?

At a bank, the numbers are bigger, for different reasons...typically 1-2 million stop for a junior trader...5-10 million for a mid level trader, and 15-20 million for a senior trader. These numbers can vary a lot between firms...and the reason for the larger risk limits are partially because these traders are making markets to big clients..in sizes that are larger than the liquidity available in any screen...which means sometimes you get hit with an instant loss.

for example, If a market maker gets asked to bid on 1 billion 30 year bonds, but the screens only show 5mm on the bid and offer...what can you do? Either you widen out the spread, a lot, or you take on huge position risk. If you widen the spread a lot, most customers will just not trade with you and then you lose the customer for future business. So, you quote a reasonable spread..maybe 6 ticks on 1 billion 30 year bonds, giving a little cushion...and you take on some position risk as you try to hedge the position..you'll sell bond futures, 10yr notes, maybe even 5yr notes. However, 30yr bonds can gap 20-30 ticks in an instant...which would give you an instant 600k-900k paper loss, and you still have the position. Now, sure,it could gap in your favor, with you sitting on an instant paper gain...but risk is only caring about limiting the downside.

Cut your losses, and the gains will come. This is why prop firms can start out a junior trader with a $1,000 daily stop....a great trader will start trading just 1 contract, make money and not need the large loss cushion. Most people don' become good traders...and this is an efficient way of weeding them out.