I understand that some large banks like Goldman, hires some bright traders to their prop desk, or keep a side prop trading book in addition to core business books. Those traders are Goldman employees, paid base salaries and percentage of the trading profit. They use 100% Goldman capital. Then the prop trading firms like Bright Capital. Do they operate the same as Goldman prop desk does? It appears to be different. It is more like a contractor, not employee. I figure trader pays some fees to Bright for the education and use of its office and system. Or trader pays a fee to join. Then Bright lets traders use its capital and take a cut of the profit. Traders are not paid with any base salary or benefits. Anything that I'm missing?
Your first para abt Goldman props is more or less in line. So prop traders at banks usually just execute large institutional client deals which most times are hedges against some other part of that client's business with the firm or their currency risk etc. Outright positions/risk trading is very less compared to what it was before 2008. the second category that you mention have diff. models but none have a fixed salary or a base pay/benefits. There are firms who charge you for monthly subscription demos and then fund you if you pass their insane trading rules which 99% of them won't. Then comes 2nd category who will ask you to pay for their educational content and fund you with some shitty BP and limits. 3rd are firms that will allow you to outright trade their capital but their profit share will be in early to late 40-50%. Last are firms that ask you to put some capital and give you 20-30 times leverage on that capital as BP. They give payouts 80% or above. Good part is your inital capital is yours itself so there is no sunk cost here. If you wanna pull out, you get that capital back but yeah need to be aware which are scams/which are not which I have navigated well in a decade of trading with props
RedSun - A Prop firm is a trading operation that can be either regulated or unregulated. An unregulated prop firm uses partner's capital to make money by trading. They can hire employees to trade, but they are employees. They can't take trader money as first loss and mark up anything for profit. They make their money when the trader makes money trading. The regulated prop firms come in general in two types and are SEC regulated Broker Dealer and require a SRO to monitor their business like an exchange or FINRA. They are the traditional prop firm and JBO. An example of the traditional prop firm would be SIG (Susquehanna Financial Group). They make their money when the trader makes money trading. They traders are employees and do not offer capital. The other type is the Joint Back Office (JBO) structed Prop Firm. This is the type where the trader puts up money as first loss, the firm provides leverage, the trader is some type of partner and get paid with a K1. This model allows the firm to markup commissions, interest, platform fees etc. They can make their money from education, commissions, interest, desk fees, and their cut of profits, which is generally very low and not a profit center. These firm require you to lock up your deposit for 1 year and follow their rules, if your capital is commingled with firm capital, which is the most common set up. I hope this helps. Feel free to contact me directly for any follow up questions.
I remember some guy who is a former NYMEX floor trader. He let some of his associates to trade his own capital and take a cut. He runs a hedge fund on the side. His accountants would review the prop trading reports and watch the performance. But it is not a formal prop setup. I believe he set up some rules and if any of his traders violate any rules or have poor performance, he can end the arrangement. So it is an informal arrangement. I believe that had worked well since he can't trade his own money; he knows of those traders; he gets the diversification from multiple traders to minimize his risk. The traders get access to his capital and keeps probably 50/50 from the profit.
It depends on what kind of situation you are in when you come in. Do you have a track record or capital to put up? Props like SMB or T3 will give pretty much anybody at least an interview and if you have capital as a first loss, they will give you a bit of their capital as well to see what you can do. Once you start making money, you can restructure the deal into a proportional loss model or a bigger split etc. There are other business models of prop firms out there like others pointed out as well, but this is the one I'm familiar with. My one tip is to be sure what kind of fees your account is on the hook for and everything is negotiable. The more money you make for them, obviously the better terms you can get for yourself.
It seems there are two types of prop businesses at the ends. One end is the service oriented that provides trading infrastructures for a fee. This is good for some new traders. But they probably do not want new traders to trade their capital. Then on the other end is the full prop trading firm that is more interested in sharing trading profits. They probably want traders to add their own capital too. More experienced and profitable traders like to join those firms. Then we have a lot more firms in the middle. They try to do both...
From my experience (not an expert by any means), there seems to be different "tiers" of prop firms. The lowest ones are like earn2trade and all the others where you pay a monthly fee for an evaluation and they will pay out in a real account afterwards as long as you follow their rules. Upside is that you don't need a track record or any capital except for the monthly evaluation fees. Next tier is what I said about T3 or SMB. They almost always require a capital contribution and mostly operate on a first loss model until you earn enough for them to give them a cushion and may move you a proportional loss. Top tier is props that give you a salary plus bonus like a real portfolio manager at a fund and no capital contribution. These guys require extensive track records and experience, not something an average Joe who has been trading a RH account for a few years can get into. This is something like FirstNY or Jane Street where programming and algo background will help as well.
If some prop traders become successful and accumulated their own trade capital, they may want to leave the prop firm and trade on their own. Of course they will have do own risk management. But so much freedom and get keep all the profit.
For me, props make sense if it allows you to trade bigger than you would be able to otherwise. For my trading style extra leverage by itself is useless, you have to make sure they are there to back your losses when necessary so that you can make bigger bets overall. I find the other aspects such as education and fees to be typically overpriced, but you just gotta evaluate the whole package.