Many people have heard of proprietary trading, but wonder what is a proprietary trading firm The article below should help to explain what a proprietary trading firm is, lists some proprietary trading firms and explains how to join a proprietary trading firm.
There are a variety of reasons why a person might show an interest in starting a proprietary trading firm or joining one. First of all prop trading gives access to fantastic technology, support, reduced commissions are also available to traders at prop member firms and prop traders have the added advantage of working with other professionals in the trade.
A successful proprietary trader has wonderful account statements that display a breakdown of P/L metrics (number of winning/losing trades; average size of winners/losers; breakdowns by long and short trades) Proprietary traders have to be able to cope with risks, be consistent and demonstrate good risk management. Once a prop trader has been profitable for a good amount of time then it is worth increasing the trading size. Increasing the size of proprietary equity should be done slowly, but demonstrate the balance of mind to handle greater risk. Those individuals who are interested in joining a prop trading firm should treat their present trading as a trial run for working with a top proprietary trading firm. Even if an individual is trading on a smaller scale the documentation should prove that they can trade successfully.
In proprietary trading there are certain terms that are used to describe the different elements of trading. A prop desk is the term for investment banking describing when a firms traders participate actively in trading stocks, bonds, options, commodities, derivatives or other financial instruments with their own finances rather than those of its clients so as to make a profit of their own. Proprietary trading firms use many tactics like index arbitrage, statistical arbitrage, merger arbitrage, fundamental analysis, volatility arbitrage or macro trading, similar to a hedge fund.
Proprietary trading has evolved so much that now investment banks employ many desks of traders who concentrate their entire efforts on proprietary trading with the goals of making extra profits above that of trading. Top investment banks like Goldman Sachs, Deutsche Bank, and Merrill Lynch all make huge yearly profits through proprietary trading.
A major strategy in prop trading is arbitrage. Arbitrage can be defined as using a price discrepancy through the investment of particular combinations of securities to gain a profit.
Investment banks that participate in prop trading are required to have a Chinese wall that divides their trading and investment banking divisions. However in the more recent years, going back to the Enron saga these have been under huge criticism.
Some of the best prop trading firms include; Advantage Futures, Allston Trading, Archelon LLC, Assent, Bear Capital Partners, Belvedere Trading, Blue Capital Group, Breakwater, Bright, Trading Broad Street Trading, Chicago Trading Company and The DRW Trading Group to name just a few.
In order to start trading as a "true" proprietary trader it is necessary to receive sponsorship for a Series 7 license. Some firms allow individuals to trade without a license using a leverage of over 4:1, but "true" proprietary traders require a license. The materials that are tested on the Series 7 exam include basic securities industry legislation and regulations, how financial instruments are issued and traded. Once you qualify with a S7 license you are ready to start trading.
Nearly all proprietary firms ask for a deposit to join their firm. The deposit varies from firm to firm, but generally it is $10K minimum although some prop firms accept individuals with just $5K. The deposit paid then goes directly into your capital account at your new proprietary firm.
The starting salary for a newbie prop trader is usually around 60k as well as uncapped bonus. Supervision is usually given for newcomers to the trade. At many prop firms they require potential employees to take aptitude tests before hiring. They might also have a mock trading program..