Proprietary trading is something that has been around for a long time, although the number of dishonest practices seems to have increased.
This sort of companies is supposed to look for great traders to manage their funds doing short term trading. These traders will make great profits for the company, which will later share them with the former.
Proprietary trading hedge funds?
Is not it a sort of hedge fund then?
It sounds like that actually.
A hedge fund looks for some talented traders to make big profits for them.
This sector is attracting people who want to become traders at any price. That is not a surprise considering the depressing labor market conditions present at many major countries, even in the United States. The Spanish situation in this regard is just hopeless.
The problem is that the growth of this kind of firms lately is not a panacea.
This proliferation has come hand in hand with that of market maker brokers of all kinds, and they are both looking for the same end: to make money out of his customers. Although everybody needs to make a living from something, some of these companies incur in illicit practices.
I do not mean that there are not honest and reputable companies in this sector. However, good proprietary firms will make you go through the normal selection program. They will try to hire the best guys for them.
Proprietary trading and the scam of courses
Some proprietary trading companies are asking their potential traders to do some courses as a requisite for joining the company. In those cases, the traders is also asked to spend some time in the company working for free. The problem is that proprietary firms charge a hefty amount of money for those courses.
The fact is that many of those prop firms are making a living from teaching courses, not from trading. Those courses must be ridiculous in fact.
Proprietary trading training?
If a prop shop has big profits trading the markets what is the need to give some expensive courses for other traders?
A truly good prop shop will look for specific profiles to join their time. In those cases, it should be the company that pays for the trader formation, not the other way round.
Also, the best formation comes during real trading, like when a novice chef learned by looking how the boss cooks in real time.
If people think that they are going to be professional arbitrageurs or the new Jesse Livermore by attending an expensive course, they are completely wrong.
I think that the best for a trader is to run away from companies who ask for big deposits, either for courses or whatever. The more they ask, the faster you run away.
Proprietary trading and day trading
There are also “prop shops” that ask for deposits to its potential traders. With those deposits the traders are meant to have the same and “outstanding” trading conditions of the prop firm; conditions like lower commissions for example, or being able to use a professional platform, or having enough margin to do day trading (you need a 25k account to day trade stocks in the United States).
Everything there seems to be an advantage, but the real problem is that these companies promote two things: a lot of operations (since they win commissions), and day trading, of course.
When a trader tries to do dozens of traders per day it will not be long till he ends up losing his entire account; no matter how “good” commissions and conditions are.
I suspect that many of those companies look for customers desperate to learn the “benefits” of day trading knowing that the World is full of them.
Their conditions to be able to join their company are things like: “you need to do x trades per month; otherwise we will have to charge you $200 for our great platform”. That number of trades means that you have to do day trading.
After many weeks trading commissions, spread and slippage kill you, but you will think that your losses are because you did not trade “well”.
Proprietary trading commissions
After some months and with a 60% loss, you will wonder why you are losing so much.
Well, if you take a calculator and sum all the costs you will find out that they are responsible for a lot of your losses. In this respect, these companies would be your market makers charging you a myriad of hidden commissions.
Best of all, if there is a good trader that is capable of making good profits; these companies will make him share a significant percent of it with them.
It is a very good business indeed.
I would never join one of this “arcade” trading firms if they ask me for money to do day trading, no matter how good their professional platform is.
A normal futures broker, for instance, do not promise you nothing. Conditions are there for everybody, and you do not work for them. You win, and you keep your profits, you lose and your account is reduced.
No broker should promise you that if you pay them $3.000 they will make you a great trader and after the course they will tell you that you do not have the profile they were looking for.