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Definition of a prop firm
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Definition of a prop firm

  #1 (permalink)
Market Wizard
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Definition of a prop firm

I would like to try and clear some confusion when looking for the term "Prop trading firm".

In my mind, any proprietary trading firm is one that gets people on board to trade their (meaning the firm's) own money, with a split of any profits.

However there's a lot of self-styled "Prop firms" out there that claim to offer profit split, but only after going through their training courses, which usually entails paying them a significant hefty sum upfront.


To me that's not a prop firm. That's a training firm.



I'd be interested in hearing other's views on this.

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  #2 (permalink)
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  #3 (permalink)
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Technically, any "prop trading" or "proprietary trading" is trading a firm's money, as opposed to trading the money of investors, depositors, or partners. It may or may not have some sort of profit splitting, but that doesn't matter. Banks or other financial institutions may have prop trading desks or departments which trades the firm's own money, as opposed to the money of others.

So if you go to some prop firm like SMB where you pay to be trained then are given an account of their money to trade, it is called a prop firm because you are trading the firm's money.

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  #4 (permalink)
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xplorer View Post
I would like to try and clear some confusion when looking for the term "Prop trading firm".

In my mind, any proprietary trading firm is one that gets people on board to trade their (meaning the firm's) own money, with a split of any profits.

However there's a lot of self-styled "Prop firms" out there that claim to offer profit split, but only after going through their training courses, which usually entails paying them a significant hefty sum upfront.


To me that's not a prop firm. That's a training firm.



I'd be interested in hearing other's views on this.

You mean like all these combines that people spend money on? Definitely pipe dream “training” firms

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  #5 (permalink)
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blb014 View Post
You mean like all these combines that people spend money on? Definitely pipe dream “training” firms

Yeah, those are examples.

Since you mentionied "combines" I figure you are referring to Topstep Trader? I don't think I could ever pass a combine unless I was trading micro futures contracts and had a few months to slowly grind my way to the profit targets. Meanwhile, I'd cough up hundreds of $$$ to them to be in the combine. Nice job if you can do it...

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  #6 (permalink)
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Prop firm is a very competitive business as many want to attract the best talent out there. The industry itself is very capital intensive and has a high cost of technology. Hence, The number of prop firms has gone down drastically in the last few years as a result of these costs. In my personal opinion, those who have succeeded are those that were able to facilitate two types of traders:
1) Algo/HFT traders
2) Spread traders. Those who traded non-exchange and exchange recognized spreads

Some prop shops provide training, but it is supplied without pay to those who have passed selection criteria based on aptitude and other attributes that the prop shop considers essential to becoming a successful trader.

The Futures prop shop that I talk to over the years had exchange memberships, so the funded customers pay pennies in commissions and way below retail exchange fees. Naturally, they want to reduce the cost of execution for the profitability.

Matt Z
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PM with any questions about optimusfutures (800) 771-6748 (561) 367 8686. THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING.
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  #7 (permalink)
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blb014 View Post
You mean like all these combines that people spend money on? Definitely pipe dream “training” firms


shodson View Post
Yeah, those are examples.

Since you mentionied "combines" I figure you are referring to Topstep Trader? I don't think I could ever pass a combine unless I was trading micro futures contracts and had a few months to slowly grind my way to the profit targets. Meanwhile, I'd cough up hundreds of $$$ to them to be in the combine. Nice job if you can do it...

I actually did not have those firms in mind, for two reasons:

1) if they do, in fact, have long-term traders that have passed their criteria and are being funded with a profit split, in my mind they would fall into the "prop firm" definition I talked about

2) there is no "paid training before being funded". Having said that, there is still a fee to be paid until one is consistent


You hear many stories about these firms but, as someone pointed out, you never get talk to people who have been long-term partners, so there is little frame of reference.

I would have tried one of these to see for myself but they do not support the trading platform I use.


Last edited by xplorer; June 9th, 2018 at 04:12 AM. Reason: Clarification
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  #8 (permalink)
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shodson View Post
Technically, any "prop trading" or "proprietary trading" is trading a firm's money, as opposed to trading the money of investors, depositors, or partners. It may or may not have some sort of profit splitting, but that doesn't matter. Banks or other financial institutions may have prop trading desks or departments which trades the firm's own money, as opposed to the money of others.

So if you go to some prop firm like SMB where you pay to be trained then are given an account of their money to trade, it is called a prop firm because you are trading the firm's money.

Thanks shodson. I see what you are saying.

My point is this:

1) I presume that any such firm is going to give you an account of their money to trade provided you have demonstrated profitability. In other words, I don't expect any firm would risk money upfront letting you trade without some track-record, even if based on the in-house training they provided.

2) If you take a person that a) wants to trade and b) has never traded before, what are the chances that they will be profitable after having taken any training course, i.e. one that likely lasts between 1-5 months?

3) On this prior point, we also need to define "profitable" carefully.

4) In my mind, either

a person has already such a level of prior trading experience that they come to the firm already profitable and with a track record (or able to pass their selection criteria), hence they would not need to pay for training

or

they do need training / more experience, which means they are unlikely to be ready by the time they finish the course, hence no sponsoring



Do you see the dilemma?

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  #9 (permalink)
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mattz View Post
Prop firm is a very competitive business as many want to attract the best talent out there. The industry itself is very capital intensive and has a high cost of technology. Hence, The number of prop firms has gone down drastically in the last few years as a result of these costs. In my personal opinion, those who have succeeded are those that were able to facilitate two types of traders:
1) Algo/HFT traders
2) Spread traders. Those who traded non-exchange and exchange recognized spreads

Some prop shops provide training, but it is supplied without pay to those who have passed selection criteria based on aptitude and other attributes that the prop shop considers essential to becoming a successful trader.

The Futures prop shop that I talk to over the years had exchange memberships, so the funded customers pay pennies in commissions and way below retail exchange fees. Naturally, they want to reduce the cost of execution for the profitability.

Thanks Matt, well, if they provide unpaid training then they would be legit prop firms in my mind.

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  #10 (permalink)
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xplorer View Post
Thanks Matt, well, if they provide unpaid training then they would be legit prop firms in my mind.

I think you just focused on one sentence. A prop firm could potentially have an educational arm, where someone could share with you his or her knowledge for a fee. However, that is an additional source of income and not where they (in my opinion) get their talent pool from. The "legit" part again, in my opinion, is the selection criteria, splits, and whether you need to show a real-time record.

Ask yourself one question: "what would I require from anyone if they asked me to hand them over my money to trade?". Further, Imagine you had a number of talented people you can choose from, and now you can be selective with your criteria. This would be a good start to think how props would act as well.

Matt Z
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There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

PM with any questions about optimusfutures (800) 771-6748 (561) 367 8686. THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING.
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