The purpose of this article is not to review the different
proprietary trading firms and their programs proliferating the OTC/Futures market but to examine the merits of the latest craze from the perspective of someone who has worked in
all segments of the trading industry.
I have been a professional money manager for more than 20
years, having worked as a proprietary trader for an investment bank and HNWI, a hedge
fund manager, and for the last 12 years as an incubator of emerging traders.
The Real World
The hedge fund industry comprises roughly 15,000 hedge funds
managing an estimated $5 trillion dollars, this includes CTA/Managed Futures
managers. It is reported that about 6% of these funds close each year, with an overall average return of around 8% per annum if you take a long-term view of the industry.
Most importantly for our discussion, the fee structure is around 1%
per annum management fee and a 20% performance fee above a high-water mark. I
should add that managers' fees have been under pressure for years. Establishing a hedge fund or a regulated managed account is onerous from a regulatory point of view, as are the costs for establishing and maintaining compliance, along with auditing and administration fees.
Institutional investors have grown tired of paying fees to hedge funds for what they see as “skill-less returns” https://t.co/j6eXqDumek
— Bloomberg Asia (@BloombergAsia) May 31, 2024
To have any chance of raising sufficient money, the fund manager normally needs, at the very minimum, a 2-year track record, but more like 5-years, attractive risk-adjusted returns, and some previous firm and education pedigree.
The above is the formula required to play in the money
management game with a reasonable amount of money under management. However,
nothing is guaranteed. Many talented traders meeting the above criteria still
struggle to attract enough attention or interest to raise sufficient funds to
run a viable fund.
There are other forms of professional trading opportunities.
This is where you formally become an employee of a bank or a proprietary trading firm
managing the firm’s own capital. These are often highly sought-after positions
that pay well, around 10% of profits.
In short, getting the opportunity to trade with sizeable
capital is very tough. It is very similar to making a good living as a
professional sportsman. The competition is fierce, and only a very small portion of people are trying to make it into the big leagues. Of course, we mainly see the successful ones as they are what the marketers focus on, exploiting the way our brains are wired to extrapolate the success of a small number into what we
think is a much larger number.
#ESMA is conducting preliminary reviews on potential regulations for proprietary trading.
— Finance Magnates (@financemagnates) May 31, 2024
Filling the Gap
The online trading
Online Trading
Online trading represents the trading of fiat currencies, digital currencies, commodities, stocks and indices, where traders and investors intend to make a profit, via the purchase or sale of the aforementioned products. This is done through an electronic network, made accessible by brokers in the form of an online trading platform or hub.Online trading continues to see a rapid growth year on year, due to a number of reasons. Firstly, the number of brokers offering their services, with more mone
Online trading represents the trading of fiat currencies, digital currencies, commodities, stocks and indices, where traders and investors intend to make a profit, via the purchase or sale of the aforementioned products. This is done through an electronic network, made accessible by brokers in the form of an online trading platform or hub.Online trading continues to see a rapid growth year on year, due to a number of reasons. Firstly, the number of brokers offering their services, with more mone
Read this Term craze that started in the 1990s with the burgeoning internet accelerated in the 2000s with the growth of the OTC market, which Finance Magnates readers are extremely familiar with and well-informed about. This growth has continued to date and spawned a massive industry.
I
don’t have the space to describe the growth of this industry in detail, but one
of the catalysts for the growth in the industry has been the incredible success
of MetaQuotes (MT4 & MT5). The technology package this firm developed
enabled companies with very limited technology and industry experience to set up a broker very easily and relatively cheaply.
The prop firm concept for retail-type traders has been
around for many decades and is nothing new. It has been there to provide retail
traders who wish to become professional traders a way to fill the gap where
they lack access to capital and perhaps formal pedigree.
These prop firms
usually required your physical presence, the purchase of their education
package, and attached onerous trading rules that made it quite difficult to
trade successfully, but for those who are able to adapt to the rules and trade
profitably, this is a wonderful legitimate opportunity.
The MT4 and the MT5 are two of the most popular trading platforms used by traders worldwide. Here’s a side-by-side comparison of the two platforms to help you decide which version is best for you. 💻📈
#DooPrime #Trading #TradingPlatform #MetaTrader4 #MetaTrader5 #MT4 #MT5 pic.twitter.com/DP0Vh9WNnd
— Doo Prime (@dooprime) May 28, 2024
However, the marketing-savvy online retail trading
Retail Trading
In finance, retail trading refers to individual traders, trading through a broker, or on a platform. This can include novice traders and experienced traders. Trading and investing are divided into two categories, retail and institutional. Institutions include investment banks like JP Morgan or Citibank and global central banks like the US Federal Reserve and the European Central Bank. When we talk about retail trading however, we usually are referring to forex trading, but there are retail trade
In finance, retail trading refers to individual traders, trading through a broker, or on a platform. This can include novice traders and experienced traders. Trading and investing are divided into two categories, retail and institutional. Institutions include investment banks like JP Morgan or Citibank and global central banks like the US Federal Reserve and the European Central Bank. When we talk about retail trading however, we usually are referring to forex trading, but there are retail trade
Read this Term industry has, over the last few years, witnessed massive growth in prop firms that, for a modest fee, offer you a relatively easy challenge and then the option to trade a decent sum of money and keep 80% of the profits you make while working from home. The temptation to make a decent living and be your own boss for a modest
upfront payment was and is simply too tempting for almost anyone interested in
trading.
Is it a Scam?
There is not an investor in the world who will give their
money to someone with no trading pedigree to trade and let them keep 80-90% of
the profits while they take all the risk. As discussed above, the industry
standard for high-pedigree traders is between 10-20%. Whenever someone offers
something way out of the norm, you should be concerned.
To begin with, the money the trader is trading is not real money. The firm offering the prop capital charges a fee, which they are banking on using to pay the small percentage of winners their inflated profit share. As soon as there are not enough new traders entering the system to cover the payouts of the winners, the firm becomes technically insolvent and unable to pay fees.
These new style prop trading firms have become victims of
their own success. The demand for cheap capital to trade with a high payout is
insatiable. With this increased demand, more and more prop firms have opened, increasing the competition for new clients. The increased competition has seen
the costs of client acquisition grow, and the number of new firms opening
without sufficient capital backing and expertise to manage the risk grow.
Prop Trading in the US: A Side-by-Side Review of How Higher Leverage Attracts Traders pic.twitter.com/YaqkEw2PPa
— Finance Magnates (@financemagnates) June 1, 2024
This has already led to a number of firms going bankrupt and more and more of these firms deploying unscrupulous behavior, such as denying profit payouts because of breaches of trading rules that are often not clearly made public to the trader or, even worse, made up on the go.
In essence, the business models of most businesses offering 80-90% profit share are unsustainable, and most will eventually go bankrupt, leaving clients with unpaid profit share. This part of the industry continues to become increasingly dodgy.
Final Thoughts
To use a trading analogy. The current wave of retail prop trading firms offering an 80% profit share is an excellent trading opportunity for a trader looking for more capital to trade. The downside is relatively
small, like an option, as you can only lose the amount of money that a
challenge costs.
If looking for increased capital is your goal I would stick to
the well-known brands who have enjoyed a lot of early success as they are
probably in the best financial position to continue to payout winners. Enjoy it
will it lasts as it is simply not sustainable in its current form of paying out
80% of profits.
Next time, I will discuss what I think is a more sustainable
model for traders looking for additional capital.
The purpose of this article is not to review the different
proprietary trading firms and their programs proliferating the OTC/Futures market but to examine the merits of the latest craze from the perspective of someone who has worked in
all segments of the trading industry.
I have been a professional money manager for more than 20
years, having worked as a proprietary trader for an investment bank and HNWI, a hedge
fund manager, and for the last 12 years as an incubator of emerging traders.
The Real World
The hedge fund industry comprises roughly 15,000 hedge funds
managing an estimated $5 trillion dollars, this includes CTA/Managed Futures
managers. It is reported that about 6% of these funds close each year, with an overall average return of around 8% per annum if you take a long-term view of the industry.
Most importantly for our discussion, the fee structure is around 1%
per annum management fee and a 20% performance fee above a high-water mark. I
should add that managers' fees have been under pressure for years. Establishing a hedge fund or a regulated managed account is onerous from a regulatory point of view, as are the costs for establishing and maintaining compliance, along with auditing and administration fees.
Institutional investors have grown tired of paying fees to hedge funds for what they see as “skill-less returns” https://t.co/j6eXqDumek
— Bloomberg Asia (@BloombergAsia) May 31, 2024
To have any chance of raising sufficient money, the fund manager normally needs, at the very minimum, a 2-year track record, but more like 5-years, attractive risk-adjusted returns, and some previous firm and education pedigree.
The above is the formula required to play in the money
management game with a reasonable amount of money under management. However,
nothing is guaranteed. Many talented traders meeting the above criteria still
struggle to attract enough attention or interest to raise sufficient funds to
run a viable fund.
There are other forms of professional trading opportunities.
This is where you formally become an employee of a bank or a proprietary trading firm
managing the firm’s own capital. These are often highly sought-after positions
that pay well, around 10% of profits.
In short, getting the opportunity to trade with sizeable
capital is very tough. It is very similar to making a good living as a
professional sportsman. The competition is fierce, and only a very small portion of people are trying to make it into the big leagues. Of course, we mainly see the successful ones as they are what the marketers focus on, exploiting the way our brains are wired to extrapolate the success of a small number into what we
think is a much larger number.
#ESMA is conducting preliminary reviews on potential regulations for proprietary trading.
— Finance Magnates (@financemagnates) May 31, 2024
Filling the Gap
The online trading
Online Trading
Online trading represents the trading of fiat currencies, digital currencies, commodities, stocks and indices, where traders and investors intend to make a profit, via the purchase or sale of the aforementioned products. This is done through an electronic network, made accessible by brokers in the form of an online trading platform or hub.Online trading continues to see a rapid growth year on year, due to a number of reasons. Firstly, the number of brokers offering their services, with more mone
Online trading represents the trading of fiat currencies, digital currencies, commodities, stocks and indices, where traders and investors intend to make a profit, via the purchase or sale of the aforementioned products. This is done through an electronic network, made accessible by brokers in the form of an online trading platform or hub.Online trading continues to see a rapid growth year on year, due to a number of reasons. Firstly, the number of brokers offering their services, with more mone
Read this Term craze that started in the 1990s with the burgeoning internet accelerated in the 2000s with the growth of the OTC market, which Finance Magnates readers are extremely familiar with and well-informed about. This growth has continued to date and spawned a massive industry.
I
don’t have the space to describe the growth of this industry in detail, but one
of the catalysts for the growth in the industry has been the incredible success
of MetaQuotes (MT4 & MT5). The technology package this firm developed
enabled companies with very limited technology and industry experience to set up a broker very easily and relatively cheaply.
The prop firm concept for retail-type traders has been
around for many decades and is nothing new. It has been there to provide retail
traders who wish to become professional traders a way to fill the gap where
they lack access to capital and perhaps formal pedigree.
These prop firms
usually required your physical presence, the purchase of their education
package, and attached onerous trading rules that made it quite difficult to
trade successfully, but for those who are able to adapt to the rules and trade
profitably, this is a wonderful legitimate opportunity.
The MT4 and the MT5 are two of the most popular trading platforms used by traders worldwide. Here’s a side-by-side comparison of the two platforms to help you decide which version is best for you. 💻📈
#DooPrime #Trading #TradingPlatform #MetaTrader4 #MetaTrader5 #MT4 #MT5 pic.twitter.com/DP0Vh9WNnd
— Doo Prime (@dooprime) May 28, 2024
However, the marketing-savvy online retail trading
Retail Trading
In finance, retail trading refers to individual traders, trading through a broker, or on a platform. This can include novice traders and experienced traders. Trading and investing are divided into two categories, retail and institutional. Institutions include investment banks like JP Morgan or Citibank and global central banks like the US Federal Reserve and the European Central Bank. When we talk about retail trading however, we usually are referring to forex trading, but there are retail trade
In finance, retail trading refers to individual traders, trading through a broker, or on a platform. This can include novice traders and experienced traders. Trading and investing are divided into two categories, retail and institutional. Institutions include investment banks like JP Morgan or Citibank and global central banks like the US Federal Reserve and the European Central Bank. When we talk about retail trading however, we usually are referring to forex trading, but there are retail trade
Read this Term industry has, over the last few years, witnessed massive growth in prop firms that, for a modest fee, offer you a relatively easy challenge and then the option to trade a decent sum of money and keep 80% of the profits you make while working from home. The temptation to make a decent living and be your own boss for a modest
upfront payment was and is simply too tempting for almost anyone interested in
trading.
Is it a Scam?
There is not an investor in the world who will give their
money to someone with no trading pedigree to trade and let them keep 80-90% of
the profits while they take all the risk. As discussed above, the industry
standard for high-pedigree traders is between 10-20%. Whenever someone offers
something way out of the norm, you should be concerned.
To begin with, the money the trader is trading is not real money. The firm offering the prop capital charges a fee, which they are banking on using to pay the small percentage of winners their inflated profit share. As soon as there are not enough new traders entering the system to cover the payouts of the winners, the firm becomes technically insolvent and unable to pay fees.
These new style prop trading firms have become victims of
their own success. The demand for cheap capital to trade with a high payout is
insatiable. With this increased demand, more and more prop firms have opened, increasing the competition for new clients. The increased competition has seen
the costs of client acquisition grow, and the number of new firms opening
without sufficient capital backing and expertise to manage the risk grow.
Prop Trading in the US: A Side-by-Side Review of How Higher Leverage Attracts Traders pic.twitter.com/YaqkEw2PPa
— Finance Magnates (@financemagnates) June 1, 2024
This has already led to a number of firms going bankrupt and more and more of these firms deploying unscrupulous behavior, such as denying profit payouts because of breaches of trading rules that are often not clearly made public to the trader or, even worse, made up on the go.
In essence, the business models of most businesses offering 80-90% profit share are unsustainable, and most will eventually go bankrupt, leaving clients with unpaid profit share. This part of the industry continues to become increasingly dodgy.
Final Thoughts
To use a trading analogy. The current wave of retail prop trading firms offering an 80% profit share is an excellent trading opportunity for a trader looking for more capital to trade. The downside is relatively
small, like an option, as you can only lose the amount of money that a
challenge costs.
If looking for increased capital is your goal I would stick to
the well-known brands who have enjoyed a lot of early success as they are
probably in the best financial position to continue to payout winners. Enjoy it
will it lasts as it is simply not sustainable in its current form of paying out
80% of profits.
Next time, I will discuss what I think is a more sustainable
model for traders looking for additional capital.
