Prop trading is becoming more and more popular and is radically changing compared to a few years ago.
What is prop trading? And, more importantly, what has become of it in the last few years? In recent times we have seen the flock of companies offering positions such as "junior trader" or as "Fx trader", companies that offer work as a "remote position", therefore without a physical location where to actually operate as a trader . How has everything changed, and why?
The lockdown has certainly contributed to this trend which, as we will see, could prove dangerous in the long term. Let’s see together how the world of prop trading works and how it has changed in recent years, if not in recent months.
Prop Trading, what it was until a few years ago
Briefly summarizing, prop trading is that branch of trading that we could define as cutting-edge, i.e. a type of trading done by professionals specialized at the highest levels, those who before the Lehman Brothers crisis used part of the balance sheet of investment banks and of credit institutions to seek capital gains by trading, both on regulated markets and on those that are defined as "grey" or "over the counter".
In essence we are talking about the trading aces who, once the fuel of the investment banks ran out in the post-subprime mortgage crisis, found themselves without the liquidity of the banks and rightly preferred to opt for family trading offices, i.e. small companies with a few people specialized in the management of UHNWI (Ultra High Net Worth Individuals) assets, i.e. ultra-rich people with assets of over 30 million dollars, or trying to enter the world of hedge funds. Some of them have opted to open what have become the real proprietary trading companies, called "Prop Trading Houses". From here, everything changes and we arrive at what is the situation today.
Prop Trading and its evolution
We arrive around the two-year period 2010-2011 when, during the Greek crisis, we find in the global financial information news the first names of some prop trading companies that had committed some more than gross mistakes, or rather, mistakes that we can define as “fat fingers”. One of the first was a trader who operated remotely with proprietary algorithms, a trader of Indian origin who is presumed to have caused (or was a fundamental part of) the Flash Crash of the American market of May 6, 2010. The trader in question would have caused what is called “spoofing” within the trading books of the future on the S&P500 causing a market crash that "burned" 1 trillion dollars of market capitalization in total in a few minutes.
This trader worked for a prop trading company, a company that is defined by some media outlets as a company that trains traders and rents them physical workstations and software while providing capital to then "split" (i.e. divide) the profits. Basically this was, until a few years ago, a real Prop Trading company. Without mentioning names, this company had been founded by ex-traders of large investment banks, professionals of the sector with a certain reputation in the London finance scene. On this model, they opened several prop trading companies starting right from the London city environment and then extending to Amsterdam (second hub in Europe), Singapore, the USA and other countries including remote Australia.
In this context, to put it better, Amsterdam definitely positions itself as focal point for trading in Europe in the post-Brexit, a city full of proprietary trading companies that have their own headquarters close to (if not inside) the Amsterdam Stock Exchange, now home to Euronext, the main European derivatives market. Basically, we are talking about very high job profiles, very high mathematical, programming, risk management, communication skills, in short, making a selection process to become part of their trading team is certainly not an easy thing. Today the situation has changed, or rather, seems to be totally different.
Prop Trading today
Can we call it Prop Trading? Today we see many companies offering jobs as a “prop trader” or “junior fx trader” with pay on a percentage basis based on the profit earned. These companies, after an interview, offer the aspiring trader a training period that the candidate will have to pay for in order to then face a sort of "trading challenge", useful for the company to understand if the aspiring trader is profession, or at least disciplined in the activity he carries out.
After this process, the aspiring trader can have access to the capital of the company which will provide "instructions" regarding risk management and operations. Of course, all of this happens if you pass the trading challenge, otherwise, if you fail to pass this selection, you would end up paying for access without getting any type of job within the trading company. There are many proprietary trading companies that offer this type, companies that offer training courses by paying a "fee" which will be used to access the selection path useful for trading with the company’s capital.
Differences with traditional prop trading houses
While in high-level prop trading companies we see very high professionalism, selection criteria with very stringent standards and above all top-level hardware and software infrastructures, in companies that define themselves today as "prop trading houses" on the web we see instead the opposite: just pay, make a challenge and then trade with their capital and "split" the profits. Is there something underneath, or are we facing an effective innovation in the world of finance? In this case, only time can actually tell us what could happen, but we still have to take into consideration these enormous differences that characterize, at least in the ’collective imagination, the same working figure (the prop trader).
Original article published on Money.it Italy 2022-09-20 08:57:00.
Original title: Prop trading, come funziona oggi? I pro e i contro
