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I wasn't sure what thread this would be appropriate to post in. Mods, if there's a better forum, feel free to move....
When you sign up for a combine, do they ask the question, "Are you or someone in your household an employee of a brokerage firm?" (or similar?)
I find it peculiar that the exchanges consider you a "professional" if you pay a company to provide you broker services and charge you accordingly. I can see the argument that you are "working" as a subcontractor for a "prop" firm (almost like the real prop firms), but if they ask the question above, then it seems more like a brokerage service you're paying for than an actual firm of which you are professionally employed. Gray area? Perhaps. But I'm curious if they make you answer that question.
If you open a traditional brokerage account, they aren't supposed to open the account for you unless they have explicit authorization from the brokerage firm that employs you, your spouse or whomever. It's a finra thing to regulate against inside info being used to profit.
Like you said, that is strange. If I live in a house with you and a bunch of other good traders on this forum and we win consistently, the brokerages seem to have an issue? Why? I thought they make money whether we win or lose.
Apparently, at one time, it was common for a broker to get inside information then front-run a large buy or sell in an account at another firm. Of course, that would have been illegal even a hundred years ago as well. At some point, in order to circumvent regulations, brokers would open an account in their wife's name, instead of their own, to conduct these illicit trades. The brokerages like to extend the rule to people who reside together as well, since the definition of marriage is a rather narrow group that targets married people only. Cohabitation falls outside the strict definition of "marriage," but is the same in spirit as far as the regulations are concerned. Then you have to ask yourself what the definition of "cohabitation" is... (hint: sex). Since there is no way for a person to prove that they are NOT having sex with someone they live with, brokerages interpret the law to mean residing together. I understand the need for this kind of oversight. Today, trade confirms are easily shared instantly between brokerage houses. Brokerage houses generally won't break the rule though, as to do so could result in sanctions from FINRA. FINRA can essentially shut a brokerage down.
As far as I'm aware, the person employed by the brokerage firm could be fired whether or not they even new about their partner's account. I don't think there is any criminal charge, unless of course there is insider trading going on.
Then there is the issue of two brokers who are married but work for different firms... what to do? Since both broker will be required to keep their accounts in-house, they effectively violate the regulation Well, there they need to make an exception. The rule is not enforced in that case, however it must be disclosed to both brokerages and trade confirm copies must be shared with the outside firm.
Thus my question... if you open a prop account, are you an employee or a client? Exchanges call you a pro because you are trading someone else's money. But, I believe, in order to trade someone else's money, you need to be a licensed broker. Gray area. So, do the legit prop houses' (not the ones you pay for a combine) traders have to be licensed? I don't know. I had never heard of a prop shop until a few months ago.
A lot of questions, but they seem to revolve around the broker/employee question, and the status of the trader. I'll take a shot at these.
I have not ever been a funded trader for "one of these" firms. (There is a question of definition regarding what "these" firms are, which I will attempt to address.) But I am somewhat familiar with one, Topstep -- I spent quite a long time repeatedly failing the Combine there, back when I was sure daytrading would be easy. So I can speak about it up to a point, but there will be limitations to my knowledge, and what I know is confined mainly to them. Since they began the whole online "Combine" thing, and were widely copied, some -- but not necessarily all -- of the others probably are similar. (Historical note: the term "Combine" is taken from the name of a test tryout for football players in the NFL, I suppose because it combines a bunch of things that football players should be able to do. Americans like sports analogies, hence the name. )
So first, proprietary trading firms have been around for years, probably decades. Probably centuries . You would simply be given a stake by a firm or a person, and there would be a profit split. Since no one in their right mind would stake someone they didn't know something about, there would be a tryout period, on sim once computers came along, and in some cases the person wanting to join would have to add some of their capital to the firm. They would also share physical office space. This is the way it was in the old days, and sometimes "prop firm" means something like this still. It's perhaps what you may mean by "legit" prop shops in your question. I understand some also would provide training and supervision, and sometimes require particular strategies to be used. We're talking about some very entrepreneurial businesses, and I don't know all the variations. Often, you got a desk to trade at and paid a desk fee for it and for the trading platform and data, plus had the split.
Today there are a lot of purely online firms, which may not be exactly the same, but much is still the same or similar, in essence: you get some money to trade, they take a split and you get a split. And they fire you if you don't produce. You don't ever act as a licensed broker in any of these scenarios, the old-type or the new, and while you are not trading your own money, you are not acting as a broker either for anyone else. The firm is trading its own money, and you are one of the ones that the firm allows to make the trading decisions.
Today with "these firms" you do a tryout online in sim, under whatever rules they want you to follow. None of these new online firms asks for any of your capital up front (that I have seen), but they do charge a monthly fee while you are trying out (not while you are funded, if you are). Many people are indignant about the fee (believing, probably correctly, that the fee is part of the business model), and are also indignant about the fact that most who try it will fail it. (I failed many times, before the light dawned that trading is not easy.) I'll leave it to someone else to decide if it is bad that people tend to fail these tryouts. I just think traders are too optimistic about their abilities, and that most will fail them, just as most who trade live initially lose some money, sometimes all of it. But that's another topic....
So now the questions.
1. What are the traders, legally and contractually? At Topstep, and I believe at most others, you are a paid contractor, not an employee, not a broker, not a client -- assuming you have passed the tests and have gotten funded. A contractor means you are a trader for hire, and it means you are not trading your money, you are trading the firm's money under contract. This makes you a professional in the CME's eyes, and in the eyes of the IRS you are just a contractor and you are paid like any other contractor on a 1099, so your trading profits, after the split with the company (at Topstep it's 80% for you, 20 for them) are self-employed income. This means it is not eligible for the 60/40 tax split that futures profits get on their taxes in the US. (It's not your profit, because it's not your money. It's just income paid to you for work done.)
2. Topstep makes the traders pay the CME pro data fee. I don't know if they all do. I think the company should foot that bill or reimburse it, but no one asked me about it. But you are certainly a professional, in the simplest sense of the term -- you trade the money of the company that hired you.
3. These firms are not brokers. They hire traders and fund them. The traders are trading the firm's money, which they have raised separately.
4. The initial funding amount is not anything like the sim balances in the Combine accounts. You do not get to trade someone's 150,000 real US dollars, just because you didn't fail in trading a simulated account (and they don't say so, if you look at their web site.) They aren't crazy. They give you a certain number of contracts you can trade, generally both very modest and safe to everyone, and they will increase your limit, or decrease it, based on performance. Some people say that after a certain point you just are trading with your own profits, since making profits is what increases your limit, and there is something to that. But it's not as simple as having x amount of margin in a regular retail account. It's risk money initially advanced to you, and different firms have different ways to handle your risk limit, including sometimes allowing more contracts than your balance would be margin for in a retail account -- depending on their policies and your record. Sure, at some point you might want to just take your money and use it as margin in your own account, and not split any profits. They get you started. Whether you find it worthwhile afterwards is up to you.
5. Once you are funded, they will open an account for you to trade, using one of the brokers they have arrangements with. My first-hand knowledge obviously ends before this step, since I never got there. I understand (note the word I used) that the accounts are in the firm's name, not yours (remember whose money it is). I gathered this understanding from a lot of back and forth with them, where I was vacuuming up everything I could find out about them, but I can't swear to this in particular (I can't exactly swear to any of this, because it has not been something I have pursued for a while now.) Nor can I swear to what the broker will want to know about the person doing the trading. Topstep email support is extremely good, or was when I talked to them, and they may be willing to respond to those questions. But it's not your money, and you can bet that you are not listed as the owner of the account. You're just a hired gun. I can't say what information the actual brokerage firm will want about you, which I understand was important to your questions. But maybe this will clarify things a little.
By the way, is this avenue a good way to get started in trading? Up to the person, I think. Everyone should just know the rules. It's amazing how many people complain that they never realized they had broken a rule, when it's all there. But I digress....
I don't know if I got every single thing you asked, because there were a lot. I tried to hit the essentials of (1) what are the firms and (2) what are you if you are funded by them.
I also don't know whether this outline applies to every firm. For instance, one of them, I forget which now, makes you a limited LLC-type partner of the firm. I have only seen this once that I'm sure of, and I don't know if they still do, because I think the trader-recruiting firm was separate from the trading firm, and I think they have changed who they use for trading now. (Things can get convoluted in this business.) As a limited partner, it would be your money, so you have the better tax situation with the IRS. Are you still a pro to CME? Sure. Does this firm still do that? I don't know.
Inevitably this did not answer every question, but I hope it made a dent in them.
Bob.
(I always wonder how many ever read these long things I sometimes write. But I sometimes can't really stop myself once I get started. I do hope it adds something.)
When one door closes, another opens.
-- Cervantes, Don Quixote
"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much." - Jim Rohn
LOL... you met my questions in equal measure and more! Your post are always thorough... and warmly received.
Oh, it most certainly did... and then some. I had actually been wondering about the tax implication in the US and if they sent 1099s.
Even in threads where I'm not actively participating, if while skimming the thread I happen upon one of your posts, I read it from beginning to end. There is always plenty to absorb for a newbie like me and you cut straight to the chase. I wouldn't read them if I didn't find them valuable.
I don't think there is any serious participant on FIO who doesn't read your post.
On that note, this is very interesting thread, OP may have not exactly asked this but I also have few questions.
I know I don't trade US markets or live in the US, but what happens in US will be eventually trickling down in India. So, it's like watching future show. That's stretching it a little, but I guess it's also not that far fetched.
Background info in points;
1. I've a franchise of a broker with me. I've fair amount of accounts that have been opened through me.
2. There is fair amount of info/communication from top to bottom in this particular broker house but there is no real change or restriction on trading my personal account. Nor does my title changes.
3. I also do not have any operating control over accounts opened through me, I only get cut of brokerage and other revenue earned from client.
Keeping that in view. Do I count as a broker?
There seems to be a gray area here where if legal complication does come about it would be bad for me and broker will straight away shake his hands off.
Also, there is a common practice here, where its possible for you to trade for a client, you just take trading side control of their trading account (you can't withdraw or add funds in it from your side, only your client can. In India one of the good things is that you operate through exchange account which is called demat which is linked to your bank a/c. Irrespective of your broker, your demat is always with exchange). I assume it's what these prop firms do when they hire a person they deem suitable for them to do the job, but just on larger scale.
So my question regarding this is, what makes a trader in US a professional trader in the eyes of the exchange/controlling authority ? Not in the eyes of the general public.
Because there are some rules for that here too, but I just never got to that line of the business, so don't know about it, so just trying to understand how things are operated there and whats its possible future scope.
So I can speak about it up to a point, but there will be limitations to my knowledge, and what I know is confined mainly to them. Since they began the whole online "Combine" thing, and were widely copied, some -- but not necessarily all -- of the others probably are similar. (Historical note: the term "Combine" is taken from the name of a test tryout for football players in the NFL, I suppose because it combines a bunch of things that football players should be able to do. Americans like sports analogies, hence the name. 
)
