With strong motivation, perseverance, and the promise of enormous and swift earnings, a Proprietary Trader can undertake this highly merit-based but also high-risk career in the financial sector. Helping a firm use its capital to profitably speculate requires wielding a double-edged sword skillfully to m... Continue Reading
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Explore Career With strong motivation, perseverance, and the promise of enormous and swift earnings, a Proprietary Trader can undertake this highly merit-based but also high-risk career in the financial sector. Helping a firm use its capital to profitably speculate requires wielding a double-edged sword skillfully to manoeuvre through the maze of markets.
What are the typical responsibilities of a Proprietary Trader?
A Proprietary Trader would typically need to:
Prop Traders do not deal with clients. In general, firms and teams being small, the culture and lifestyle are more informal and flexible than in a bank and largely free from bureaucracy and office politics.
In an office cubicle or on a trading floor, the atmosphere is likely to be fast-paced, exciting, and stressful wherever you set up your desk. If you start your own business, you may prefer to work from home, although some training and experience in a job are handy before launching into entrepreneurship. Travel may not be frequent.
Institutional opportunities may be limited, but the internet has increased online accessibility to the masses. Smaller firms are now located in major cities and also accessible online via remote trading.
In the absence of client interaction, choose your attire from a range of dress codes from business casual to dot-com/tech startup, or even jeans occasionally. Working from home leaves you with considerable leeway, provided you are not on a video call. Face-to-face meetings or conferences may need you to don more formal business gear.
Proprietary Traders spend close to normal but nail-bitingly stressful workdays, averaging about 50 hours per week depending on the group, firm, or seniority. You may not have the luxury of coffee breaks or a quick run for errands while the markets you deal with are open. Some of the time you have at hand when markets are closed can be well-spent researching and preparing for the next day.
Since earnings are often directly proportional to the commissions they earn, business pressures can appear justified to Proprietary Traders. What is important is the profit or loss you generate (you do not receive a higher bonus for extra hours).
The markets you trade and your geographic location relative to them will dictate the quality of your lifestyle as the time difference may or may not allow you a full night’s sleep. You may end up working beyond the normal workday.
A morning meeting to review overnight phenomena typically begins a Proprietary Trader’s day, leading to the morning news and the start of trading as markets open. A discretionary role requires you to spend time buying and selling and consulting with other traders. As a quantitative trader, you will stay busy tweaking trading parameters and collaborating with developers and other quants to optimise strategies.
Market openings and closings are busiest, with the pace slowing down at midday. Wrap-up work, such as managing risk exposures, after the market closes falls in the lap of junior traders. The significant trades, overall market activity, and scheduled events for the week are also discussed.
Online job portals are a common platform for firms to post their open positions for Prop Traders. Large firms have dedicated websites that you can consult. Firms specialise in a specific set of assets ranging from equity to cryptocurrency. There is a high demand for traders with expertise in futures and other derivatives.
In this highly competitive field, also be aware of the salary structure before applying. Some firms offer low fixed compensation combined with profit-sharing opportunities. Watch out for fraudulent postings that require prospective traders to fill an initial deposit with promises of grandiose returns. Ideally, use the services of reputable job consultants in your hunt for proprietary trading jobs.
Keep in mind that, in many cases, traders working at a proprietary trading firm are contractors to the firm and not employees, financial advisors, or stockbrokers, and their main focus is on the immediate trading trends.
Proprietary Traders are generally employed by:
Professional associations and organisations are a crucial resource for Proprietary Traders interested in pursuing professional development or connecting with like-minded professionals in their industry or occupation. Membership in one or more adds value to your resume while bolstering your credentials and qualifications.
Aspiring Proprietary Traders can enhance their chances of success by gaining hands-on experience from internship programs with securities firms, in the areas of trading, asset management, or other matters related to public markets, usually in the semester preceding graduation.
Networking is important groundwork for the job. Meet Proprietary Traders, call up proprietary trading firms, and offer to intern for them. Or try to intern and work for other financial institutions on their portfolio trading desks or as a stockbroker. Internships may lead to offers of full-time jobs to high-performing interns.
Since experience is crucial in the field, aspiring Prop Traders could start chalking it up even without formal employment. You would need to open your investment account, make trades, and keep a log. This sort of engagement is similar to what you would do if formally employed in the field. Therefore, it would serve you well in your job search to present a trade diary/portfolio/history of your trading, strategies used, and successes earned to supplement any internship completed at the type of company in which you aim to work.
If you have given it a go but not met with success, take the time to pinpoint your weaknesses and strengths, evaluate your decision-making processes, and draw up a trading plan and risk control to counteract weaknesses. Trade demo capital for six consecutive months till you hit profitability. With a solid track record on the demo, you can place funds into a mini account, make trades, and build a live track record. Armed with personal success and good grades, you can pave your way to a job at a reputable prop firm. A rule of thumb is that one year is a fair indicator of future success.
Professional experience in a securities firm allows prospective applicants to indicate their strong work ethic, nifty mathematical skills, and communication abilities as precursors to successful prop trading. You can also chalk up trading from your own account as experience.
That said, employers look for a range of applicants from entry-level traders to those with three or more years of experience. Many employers offer structured internships with graduate schemes and training/mentorship programs to new entrants who enter junior trader roles directly from a degree program with zero or minimal full-time work experience.
A bachelor’s or master’s degree in finance or a related field such as business, accounting, or economics or even politics, mathematics, physics (or other sciences), statistics, computer science, or engineering will typically start you off on your career. As a rule of thumb, proprietary trading firms look to top-tier universities to recruit fresh graduates.
That said, institutes ranked lower down on the ladder can get a foot in the door if they offer outstanding tech programs, thereby enhancing recruitment potential for their top-performing students through building their math/probability/coding skills.
Undergraduate students will find it useful to opt for macroeconomic analysis, investment theory, business forecasting, data mining, mergers and acquisitions, security analysis, and international finance.
In some locations, master’s degree or doctorate holders may land higher-level positions, earning more than those with a bachelor’s. You can complete most master’s programs in a year or two. A Master of Business Administration (MBA) program typically offers training for a career in business leadership.
Some employers may look for securities traders with relevant professional certification.
The Chartered Financial Analyst (CFA) Institute is a global professional organisation that offers the CFA designation. Taking a self-study course equivalent to a graduate program prepares candidates to clear a series of three examinations sequentially to earn the CFA designation if a Prop Trader may wish to acquire it.
That said, earning a CFA credential is typically not mandatory to work as a Proprietary Trader but can help you gain professional credibility, validate your knowledge, and increase your confidence at work.
Typically, securities traders must be registered with the local financial industry regulatory authorities as representatives of their respective firms and must qualify to find a place on the list of people eligible to trade on a particular stock exchange. They may also have to take the examinations relevant to other exchanges with which they deal. Employers often offer to help traders prepare for their licensing tests
Merit is quite the crux on which pay and advancement hinge. The more and the faster you make money for your firm, the more you will be rewarded with financial returns and advancement.
That said, acquiring a CFA credential or a master’s degree, such as an MBA, or a doctorate, for instance in the field of data science or business administration, will stand you in good stead to climb the hierarchical ladder in your firm. Building technical expertise will also enhance your recruitment potential and spur your advancement.
The prop trading hierarchy follows the general sequence: “Clerk” or Assistant Trader, Junior Trader (you usually start at this level right out of undergrad), Senior Trader, and Partner.
As base salaries may not necessarily change or change in less significant measure than in other careers with progression, most gains come from increased bonuses, which means extreme variability between good and bad years. An aspect typical of seniority is that since Partners earn a fixed percentage of the group’s P&L, their bonuses are predictable, unlike their discretionary nature at lower levels.
Overall, progression in prop trading compensation can be rapid, and you can become a Partner in just a few years if you are excellent at your job. With no stock-based or deferred bonuses, all earnings are in cash, which may not be as significant at entry-level as higher up in the hierarchy.
The reality, however, is that very few Proprietary Traders continue on the trading floor past 40. The most successful ones eventually set up private businesses. Some may move into the middle or back office of a bank.
The limited exit opportunities in this field do not allow for unrestricted movement across the career map because of the diverse workplace challenges mentioned earlier, not the least of which is that the world of prop trading is unforgiving to a fault. Furthermore, even a move to a hedge fund or large bank is complicated due to differences in trading styles.
The few options at hand are typically to divert to another group at your firm or join a different prop trading firm. Be warned, however, that being fired due to underperformance at one firm is counter-productive to landing a trading job at any other firm. Other options would include going to a “normal” company in a financial role, do prop trading at commodities firms, or acquire another degree like an MBA to switch careers.
Experience in a trader’s role and a bachelor’s or master’s degree will enhance your job prospects. You also need to have plenty of grit, a passion that you can prove, swift numeracy skills, and minimal liabilities during your learning curve to help you hang in there and get ahead.
A varying combination of classroom training, trading on simulators, and mentoring from an experienced trader at work set you on the fast track to real trading. You begin in small lots fast enough, but it is your success as a trainee that will give you access to higher amounts to trade.
Some firms offer diverse training programs to recruits to teach them about the markets or established strategies, while others expect their traders to develop their own strategy. Typically, small boutique firms recruit experienced and inexperienced traders, train them, and provide buying power for them with which to trade.
Continuing education is also a requirement for maintaining a license as a trader.
As a newer trader seeking funding, be sure to do your due diligence here. You can shorten your learning curve with good quality education and advance to consistency sooner. If already consistently profitable, focus more on the payout structure than training.
How It Began
The services that big banks provide include managing financial risks, raising capital, and executing FX transactions. Trading on behalf of clients, investment banks earn fees and commissions on the transactions. However, the impetus to make profits and enjoy them in totality independent of providing client liquidity led them to strategise trading on their own account and thus began proprietary trading.
The Volcker Rule
The crash of 2008, however, led to proprietary trading being removed from all commercial banks in the US, as it was identified to be a significant cause of the global recession, with banks using money they considered theirs. The losses that resulted from the crash revealed that banks had traded with money they had no right to use. Government regulators determined that large banks made too many speculative risks that destabilised the overall financial system.
The outcome of this scenario was the Dodd-Frank Wall Street Reform and Consumer Protection Act, brought into effect in 2010 in the US, to limit the amount of risk a financial institution can take. The Volcker Rule refers to section 619 of the Act. Along with other stipulations, it prohibits banks from using their own accounts for short-term proprietary trading of securities, derivatives, and commodity futures, as well as options on any of these instruments. The Volcker Rule works on the premise that these highly risky and speculative trading activities do not benefit banks’ customers and clash with client interests.
In June 2020, some restrictions in the Volcker rule were relaxed as pertaining to bank capital requirements and the investments that banks can make in private equity and similar funds.
Proprietary trading now exists at hedge funds and is also offered as a standalone service by specialised and small/independent prop trading firms, asset management firms, and commodities companies. However, with some banks still counting prop trading as a function, keep in mind the Volcker Rule when you search for a job, and keep well away from applying for prop trading roles in commercial banks where the rule applies.
Hedge Funds vs Prop Trading
Answerability to clients is the salient feature that distinguishes hedge funds from proprietary trading. In general, hedge funds charge substantial fees to invest their client’s money and receive payment to generate gains on these investments. On the contrary, since prop firms trade their own capital and not that of clients, it is solely speculation that yields them profits.
What’s In It For You?
Prop trading offers huge and swift financial rewards in comparison with other trading industries. Given that you will likely enter the field highly motivated, you will find the work exciting and benefit from the quick and highly meritocratic career progression and earnings.
Make Sure It’s Your Cup of Tea
Prop trading resembles an extreme version of sales & trading. Go for it if you have a burning passion for the markets, you are math/CS/tech-oriented, and you know that you want to trade for a long time. If not, play it safe and launch your career at a large bank with branding, network, and better exit opportunities.
The Roles You Could Play
As a trader, your job would entail risk-management and buying & selling securities, either based on a model/software/automated approach or intuition & judgment, or both combined. As a quant researcher, you would come up with mathematical models for trading algorithms and strategies.
As a developer, you would develop researchers’ models and write & maintain the code that facilitates what traders do. In some firms, traders may find their roles classified as discretionary or quantitative, while other firms combine the functions and offer a single one, namely, “quantitative trader.”
It is tricky to delineate the roles clearly as traders must be adept at programming to collaborate with researchers and developers.
Tips for Interview Prepping
Brace yourself for plenty of mental math, brainteasers, and questions on probability. Some technical questions about options and other derivatives are likely as well. Do not underestimate the importance of how you present yourself and how what you say corroborates any previous claims you have made about your knowledge and experience.
Psychometric tests and behavioural questions may also come up, but they assess how you handle stress and emergencies rather than your leadership skills. There are books and resources available to help you practice. A prospective quant trader may be tested on programming and asked to analyse given case studies.
Limit vs Market Orders
Typically, a speculator, trader, or investor enters the market with a market order to trade a share at the best available market price at that point in time. You are called a ‘taker’ in this role as you take liquidity out of the market, the reason being that you are willing to bet that your opinion of the market being mispriced is correct.
Market makers, by comparison, only use limit orders that specify the precise (and only) price at which they are willing to be filled. For instance, a limit order of 10 shares at $100 bides time on an exchange’s limit order book till a matching market order appears and grabs it.
A market order tells the exchange to fill an order at the best possible price being offered in the exchange’s limit order book, at that moment, rather than await a potentially better price. In short, an exchange matches limit orders to market orders.
Some Prop Trading Strategies
Proprietary Traders may use various strategies such as merger or risk arbitrage, index arbitrage, merger arbitrage, global macro-trading, and volatility arbitrage. Experienced Prop Traders and quants rely on many other and more sophisticated trading strategies as well.
Using merger or risk arbitrage, the trading company buys the stocks of merging firms.
The index arbitrage strategy aims to generate profits from the difference between the stock’s actual price and its theoretical future price.
The global macro-trading strategy hinges on the interpretation of macroeconomic events on a regional, national, or international scale.
Volatility arbitrage seeks to profit from the difference in the implied volatility in the options and the corresponding movements in the underlying.
Freelance Vs. Full-Time Work
A freelance Proprietary Trader enjoys freedom with regard to flexible schedules, working hours, and location. They have full ownership of the business and can afford selectivity in terms of the variety of projects and clients presented. While it has unlimited earning potential, freelancing also has less stability and security, with inconsistent work and cash flow. There is more responsibility, effort, and risk involved. There are no paid holidays, and sick/maternity/paternity leaves are almost unaffordable. There is the added pressure of a self-employment tax and no eligibility for unemployment benefits.
A full-time Proprietary Trader, however, has access to company-sponsored health benefits, insurance, and retirement plans. They have job security with a fixed and reliable source of income and guidance from their bosses. Despite the above benefits, they are susceptible to potential boredom and inability to pursue passion projects due to their lack of time or effort. There is a lack of flexibility, ownership, and variety, compounded by the need to set aside funds for commuting and attire costs.
When deciding between freelancing or being a full-time employee, consider the pros and cons to see what works best for you.
“Nothing ventured, nothing gained” is hardly a cliche if you’ve set your mind and heart on becoming a Proprietary Trader and armed yourself with relevant skills, experience, and education. It is the motto that will define your career, but with it comes the caveat - be aware of legislative details and the limits they set so that you can be a more competent judge of when an investment turns into too significant a risk.
As a trader, you might lose money on ten trades, but at the end of the day, if you make enough money on two trades to cover losses and produce good profits, you pass the test. Expect to find breaking into proprietary trading difficult and discouraging, but if you have a track record and math background, your persistence will prove your passion for the job.
Technology is central to the modern trading business; even the most traditional point-and-click traders depend on it. From market data to connectivity, charting to spreading, there exist diverse options.
A Proprietary Trader would typically need to:
Accredited
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