Proprietary trading is not a new concept. In fact, it’s been around for decades, though the structures of today’s proprietary trading firms are as varied as the selection of cereal at your local grocery store. Generally, proprietary trading firms, or prop shops, are focused on finding professional traders who can manage the firm’s assets. While the structure provided by a proprietary trading group is great for the professional trader who knows how the industry works, there are some hidden pitfalls for the semi-pro or greenie trader choosing a firm to work with. In this post from the Apiary Fund, I’d like to go over a few elements common to most prop shops, and show you how the Apiary Fund’s unique model compares.
It usually takes some capital to get through the doors of most prop trading firms. Afterall, you’re going to be trading the firm’s money, so why shouldn’t they hold a little to cover any potential losses? Sure, they put it into an individual capital account that is kept separate from other traders’, protecting you from their losses. But, if the company finds itself in some financial trouble, your money isn’t safe. Who’s really taking the risk here?
Training and various fees
While most proprietary trading firms require some type of training and education, some shops are simply fronts for education programs and offer little if any opportunity for trading. The training they offer is usually less than stellar, as the information offered in such programs is often generic and easily obtained online. Brett Steenbarger, prolific author in the trading industry, writes in his own blog that “very high education fees may be a sign that this is actually the way that the ‘prop firm’ is making its money…There *is* no prop firm, only the illusion of one to lure newbie traders into educational programs.”
There’s nothing wrong with the idea of a firm charging for a good, quality training program. The problems come when the tuition for these programs comprise the bulk of a firm’s revenue. A prop shop should have some vested interest in its traders. It’s a matter of principle, really.
If you’re going to teach me something, you ought to stand behind what you’ve taught me. Without any risk to the firm, there’s no incentive to provide quality training. The last thing you want as a new trader is to shell out a bunch of cash in exchange for something you could have learned on your own—only to be left high and dry. As I said before, a legitimate firm should have a vested interest in you.
Where does the profit come from?
Education fees walk hand-in-hand with commission rates. A commission is a fee charged by the firm for facilitating the trade. When a firm charges a commission, they usually mandate a high amount of trades from their traders. They push their traders into the markets and demand they make trade after trade. They take their cut off of every transaction, winner or loser, and the trader is fired if he loses. This model shows a lack of vested interest by a firm in its traders, and reeks of a scam. If they see profit only when you see profit, there’s some obvious incentive for them to help you become a successful trader.
The profit-payout model is preferable to commissions. A prop shop shouldn’t make money just for facilitating your trades. If that’s their model, why would they care whether or not you’re a successful trader? And if they don’t care about your success, why would they bother creating a worthwhile training program?
A firm operating under a profit-payout model will make its money on trader profitability. It will teach you how to be successful in the markets and split your profits with you. By sharing profits, the firm is not only showing its faith in its traders, but also validating the education it provides. A shop that’s truly invested in its traders will not capitalize on a trader’s losses. A firm that’s invested in its traders will teach them how to attain success so both parties can reap the spoils together.
Nobody wants to see a firm take an enormous chunk from their paycheck, but traders also have to be wary of firms that offer surprisingly high payouts. This is also a sign that a prop shop doesn’t rely on trader profitability. Charging hefty tuition fees and then taking virtually no profit from successful trades, these firms are unwittingly showing the intrinsic value of the training they offer.
These are some of the most fundamental ways in which the Apiary model differs from that of traditional proprietary trading firms. Having provided a comprehensive education in sound risk management, Apiary is confident in its traders. So confident, in fact, that they are willing to put their own fund at risk to see you succeed.