Prop Shops - What sort of returns on investment?

PTJ

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Dec 15, 2011
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#1
I have some investors who are looking to allocate some capital to various investment strategies across a spectrum of areas with a view that the next few years will be a reasonably dangerous, risk off, volatile environment and that they may need to look outside the box to achieve their targets.

They may also have some interest in investing in a Prop Shop start up, since we look upon it as being a long gamma play in general , without a lot of capital usage and hopefully a fairly diversified portfolio of strategies/traders.

I am wondering if anyone has some idea what the rates of return on capital that the decent shops are achieving these days.

My background is prop trading/ portfolio trading but more so on the bank side for the last 20 years.

Discussion welcome.
 

tommog

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Apr 27, 2004
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#2
By Prop Shop I assume you mean like a Trading Arcade (which is obviously a different business model to that of a prop desk at a bank which you may have worked on). I have never managed a prop shop but have worked in them for the past 6 years or so so this is just based on my impression rather than me looking at the books.

There are 2 routes to go really. One where the traders essentially back themselves (most big traders will have at least 40k+ in their accounts) so the theoretical risk to the company is minimal. But in return you are going to be earning less money off your traders as they will demand a higher profit split. A few years ago there was a bit of a profit split war going on among the London houses and they went up to about 90%. But now have settled down around 70-80%. With this business model youre cushioned from trading losses but you need to have some very big traders to make it worth your while. Because the prop firm is a partner with the trader the prop firm has to wear the hardware costs of an unprofitable trader. So you need to factor in 20 desks at 3k a month thats 60k a month in overheads youre potentially on the hook for. But on the upside youre only hiring proven traders so the risk is pretty low they wont make money. Id say low risk low reward in this case.

Other option is to hire senior traders but also hire a lot of junior traders. There is a better risk reward with this route (provided you are confident in your ability to train people up) as you are risking 30-40k on a trader that can potentially earn you 100k+ a year for the next 10 years. They also generally start on a low profit split i.e 50% (ive seen lower) and you can get them involved in different markets to diversify your risk. Id say on average trainees potentially give you 5-6x returns on capital. Whereas a senior trader that makes 80k a month and youre walking away with 16k of that and on the hook for a potential black swan type event the theoretical risk:reward is probably a lot worse than the apparent risk:reward picking up steady money.

Generally the big houses STA and the like go for the first option where they merely facilitate traders that trade their own money and can afford to take a small cut of a lot of traders. The smaller houses tend to have a smaller group of traders they nurture.

Sorry I couldnt give specific numbers.
 

tommog

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#4
senior traders making 80k a month from a 40k account ??
Yeah comfortably. The prop shops put up about 3-4x margin. So 40k down they will command up to about 160k in margin.

Thats a minimum, i know guys trading 20 dax futures with 20k down.If youre consistent and stick to your limits firms give you all the rope you can handle a lot of the time
 

safvan

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Oct 22, 2010
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#7
Depends on the firm and how much money you have down but i know people on that deal
What are you talking about? 4 times the day trading capital is common and standard practice in stock trading world.

Almost all brokers that provide margin trading allow this by rule. If you have 25k, you can trade up to 100k per day and if you have 40k you can trade up to 160k. Having overnight risk under that margin is another deal but most prop shops are day trading outlets.

It seems that this forum is filled up newbies who know this profession only part time.
 

Masquerade

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Nov 28, 2007
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#8
It seems that this forum is filled up newbies who know this profession only part time.
Don't be the pot calling the kettle black.

There is huge difference between investing and trading for a living. If you trade for a living then 40% is peanuts. Heck even investing in index fund returns you around 20% per year with no effort and add dividend type scheme to it and you are there without spending more than 10 minutes in front of the screen.
 
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dc2000

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Jan 18, 2004
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#9
I have some investors who are looking to allocate some capital to various investment strategies across a spectrum of areas with a view that the next few years will be a reasonably dangerous, risk off, volatile environment and that they may need to look outside the box to achieve their targets.

They may also have some interest in investing in a Prop Shop start up, since we look upon it as being a long gamma play in general , without a lot of capital usage and hopefully a fairly diversified portfolio of strategies/traders.

I am wondering if anyone has some idea what the rates of return on capital that the decent shops are achieving these days.

My background is prop trading/ portfolio trading but more so on the bank side for the last 20 years.

Discussion welcome.
this is a joke right?

risk off ? never known any pro trader use that term
how would you not know the answer to your own question ?
a prop shop do you realise the capital outlay and in todays enviroment?
 

tommog

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#10
What are you talking about? 4 times the day trading capital is common and standard practice in stock trading world.

Almost all brokers that provide margin trading allow this by rule. If you have 25k, you can trade up to 100k per day and if you have 40k you can trade up to 160k. Having overnight risk under that margin is another deal but most prop shops are day trading outlets.

It seems that this forum is filled up newbies who know this profession only part time.
I have no idea what you're talking about, i said basically the exact same thing
 

safvan

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Oct 22, 2010
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#11
I have no idea what you're talking about, i said basically the exact same thing
Okay but I thought you implied as if its only the prop shops that can provide you with 4 times leverage, something which is standard practice with nearly all online and offline brokers in the US once you put in $25k minimum equity as per SEC day trading rules.

Yes overnight scheme of things is a different story.
 

anley

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Dec 16, 2003
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#12
With the sort of costs and leverage being discussed here I'd want (if I was an outside investor) a minimum return of 100% a year. Anything less and it woulnd't be worth the risk in my opinion.

PS. Plus for every Bund/Dax trader making £50k+ a month, I'll show you 101 traders that are really struggling. The point I'm making is that really profitable traders aren't that common in this business, at least the ones that don't blow up and last a good several years.
 

tommog

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#13
Okay but I thought you implied as if its only the prop shops that can provide you with 4 times leverage, something which is standard practice with nearly all online and offline brokers in the US once you put in $25k minimum equity as per SEC day trading rules.

Yes overnight scheme of things is a different story.
No im saying prop firms will increase your margin, not your leverage. So at a broker you would need to put down 5k in margin to get 20k after leverage for example. Prop firms will give you 20k margin for 5k down, which is then leveraged at exchange designated levels. So in effect 10k down could get you a leveraged account value of several hundred thousand.

You think all those guys that have 500 lots across the STIR curve have much more than 40k in their accounts?

Prop firms give you access to leverage and a brokerage rate just above exchange cost. Thats their job in their most basic form.
 

safvan

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Oct 22, 2010
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#14
No im saying prop firms will increase your margin, not your leverage. So at a broker you would need to put down 5k in margin to get 20k after leverage for example. Prop firms will give you 20k margin for 5k down, which is then leveraged at exchange designated levels. So in effect 10k down could get you a leveraged account value of several hundred thousand.

You think all those guys that have 500 lots across the STIR curve have much more than 40k in their accounts?

Prop firms give you access to leverage and a brokerage rate just above exchange cost. Thats their job in their most basic form.
Makes sense now. Thanks for clarification.
 

Martinghoul

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Feb 3, 2009
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#15
this is a joke right?

risk off ? never known any pro trader use that term
how would you not know the answer to your own question ?
a prop shop do you realise the capital outlay and in todays enviroment?
"Risk off" is a term that's used by a lot of people these days, pro traders included...
 

anley

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Dec 16, 2003
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#16
Risk on/risk off is a term loved and imortalised by the financial Lemmings of the market.

In effect it's a term that's used for trading ideas with little thought required or independent thinking needed, as in - we must go long/or short because everyone else is taking risk off (or putting risk on).

And the great majority of bank and other 'traders' associated with financial firms wonder why they struggle to make money (apart from in a bull market)............

PS. I'm not saying any trader should disregard the term as it has to be respected (if only because the Lemmings love it so much), but please can everyone try to be a little bit more creative with their trades, then you might find yourself going long at great levels (taking risk on) as the sad old Lemmings are all panicking to take risk-off......It's just a thought.
 

Martinghoul

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Feb 3, 2009
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#17
Risk on/risk off is a term loved and imortalised by the financial Lemmings of the market.

In effect it's a term that's used for trading ideas with little thought required or independent thinking needed, as in - we must go long/or short because everyone else is taking risk off (or putting risk on).

And the great majority of bank and other 'traders' associated with financial firms wonder why they struggle to make money (apart from in a bull market)............

PS. I'm not saying any trader should disregard the term as it has to be respected (if only because the Lemmings love it so much), but please can everyone try to be a little bit more creative with their trades, then you might find yourself going long at great levels (taking risk on) as the sad old Lemmings are all panicking to take risk-off......It's just a thought.
Who says it's a term used for trading ideas? It's just used to describe the general "mood" the market finds itself in. I use it all the time and I am not a lemming.
 
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dc2000

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Jan 18, 2004
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#18
"Risk off" is a term that's used by a lot of people these days, pro traders included...
B*******s
risk averse
exposure to x or y
Delta gamma theta vega neutral

on risk is a term used by insurers

pro traders simply do not take outright positions
 

Martinghoul

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Feb 3, 2009
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#19
B*******s
risk averse
exposure to x or y
Delta gamma theta vega neutral

on risk is a term used by insurers

pro traders simply do not take outright positions
Huh? I am a "pro trader" and I use the term and sometime I, gasp, take outright positions.