Small-Cap Stocks Are Expected To Out-Perform Large-Cap Stocks Questions to Ask When Considering Joining a Proprietary Trading Firm

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Questions to Ask When Considering Joining a Proprietary Trading Firm

If you are considering joining a proprietary trading firm, how do you evaluate the different companies – particularly if you have never worked or traded for one before?

There are so many firms out there, and they offer so many different combination of fees, environments, training, remote/onsite, market specialization, training, etc that you really have to do your homework.

Start by asking around for reputable firms but don’t be afraid to check out a new firm (as long as you do your due diligence). Nothing beats going to their location, shaking hands and taking a look around.

The great thing for traders is that there are a lot of firms out there, so you can afford to be choosy. There are a number of high profile cons out there that unfortunately taint the overall perception of the whole prop industry, but there ARE reputable ones. 

Any firm that will let you leverage their money with no money of yours up front will want you to take some kind of training course, or else have a proven and audited performance track record. This is perfectly reasonably as they aren’t in the business of giving away their money to anyone who wants a bash at trading. The training fee cushions them on the downside in case you are losing their money and the course itself ensures you at least know how they would like you to trade with their money. Whether paying for training is the right thing for you to do is the subject of another article however.

There are other prop firms that will require you to make a deposit into your trading account, usually a $5000 minimum, from which they will add extra buying power, typically 10:1, and no required courses. You still use their money for the extra leverage, but it’s your deposit money to lose, they are not intending to let you lose their part of the capital.

Here are a few questions you can ask any proprietary trading firm you are considering joining. The questions cover a range of the most important criteria that we would suggest you consider:

1. What is the name of the incorporated company, not just the trading/brand name & how long have they been in business?

  • This means you can look them up in the state register or companies house and see how long they’ve been around and in some cases, for a small fee, you may be able to access their accounts or annual returns to see how financially stable they are.

2. Find out all fees you may be charged.

  • Not just commissions! Though you should obviously find out what your total cost per contract/share is going to be, you should also ask about any desk, access or software fee’s. You should also ask about any exchange rebates, ECN kickbacks or cost reductions or price breaks for hitting volume thresholds.

3. How does the firm make its money?

  • Do they require high fees? High commissions? Are traders required to put up money before trading? Obviously, if a trading firm makes most of its money from trading activities, this is a good sign. Beware a firm that makes most of it profits from fees, such as training charges.

4. Do you need to deposit your own money, or does the firm offer “fully backed” deals?

  • If a deposit is required, how much?

5. What “size” can you trade, or what buying power will you be given?

  • What is the procedure for scaling up or increasing your size as you bank profits on your account? Is this buying power reduced if you take a draw or paycheck?

6. What markets can you trade?

  • Are there any restrictions ie: only big-cap stocks or just STIR Futures, or can you trade whatever you like? Does the firm trade a variety of products and strategies?

7. What is the profit share or payout arrangement?

  • Do you get to keep 50%, 70% or what of the trading account profits? What are the withdrawal intervals? Some firms allow only certain days of the month or a certain number of withdrawals in a month. Does the money need to stay in the account for a certain period of time?

8. What are the Risk Management parameters?

  • Is there careful business management and, more importantly, risk management? What is the management philosophy for developing traders? How do the traders view this style of management?

9. What are the loss limit criteria?

  • If you are trading with company money, how much can you lose before you have to halt trading for the day/week/month?

10. Is the firm authorised by the FSA in the UK, or NFA or SEC in the US?

  • Check and confirm any claimed regulatory affiliations. Being authorized as a prop firm is not a legal requirement in the UK unless the firm accepts deposits, but it is a definite measure of credibility and quality if they are. Be wary of any unauthorized prop groups as the regulators in many countries are giving greater scrutiny to broker dealer activities, and you don’t want your prop firm to vanish or be closed down taking your money or account profits with it!

11. Are they members of any exchanges?

  • Check and confirm their exchange memberships.

12. Is any kind of License or permit required in order for you to prop trade?

  • In America, most prop groups require NFA series 7 certificates. Canadians are exempt from this requirement. If a License is required, will the firm sponsor you? Will they help you get the License?

13. Read the client agreement or trading contract carefully!

  • Highly recommended you invest in the small expense of having a lawyer read the contract for you! You need to be aware of any preferential clauses that might obligate you to repay losses, pay fee’s or lock up your capital or profits on leaving the firm.

14. Do they offer training or mentoring?

  • Find out who provides this and how? For how long? Is there a cost? How successful have other trainee’s been who have gone through the course? How many traders have been trained and how many are still trading? Is the firm invested in its developing traders?

15. Who are the owners/backers of the firm?

  • Look them up on Google, Linkedin and anywhere else you can think of. What is their background, experience and history? Are there any skeletons in the closet that you should be aware of?

16. How long have the top traders been working with the firm?

  • Has the firm nurtured successful traders? If you see highly successful traders who are sticking with a firm, you will know that the firm is generating loyalty and offering value.

17. Talk to those who trade there, or who have gone through the training program.

  • What is the vibe in the office? What kind of people work there? Are they happy/satisfied with the company? Do traders collaborate and share ideas? Is it a fun place to work? Post questions or ask for experiences on trading forums like Trade2Win and EliteTrader though understand you will get a broad range of responses, some of which may be very polarized on subjects the writer in fact knows nothing about.

18. What trading strategies does the firm employ or prefer?

  • Are they a calendar spread or pairs trading setup? Do they market make or provide liquidity for ECN rebates? Do they permit trading outrights and in what markets?

19. What software, charting & trading platforms do they use?

  • Look these applications up – are they will known names that you would be happy to work with like TT, CQG, Reuters, Bloomberg, or are they less well developed or supported applications that may give you stability issues?

20. What is their IT hardware setup like?

  • How up to date is their infrastructure, and how is it supported? Do they have dedicated IT staff?

21. Do they provide any proprietary or in-house trading signals, software or technology?

  • Do they have superior trading platforms, IT support, and decision-support tools for traders?

22. Look up any regulatory infractions, disciplinary actions or judgments against them. 23. Who do they clear their trades through?

  • Check the clearer out and make sure they are financially stable and reputable, since this is ultimately where your money or account will be held.

24. Ask for a copy of the prop firms most recent financial statements or balance sheet.

No single firm will deliver everything all you would like across all of these suggested criteria, but if you keep a “score” against their responses, you’ll quickly separate the most attractive options from the rest. Find a prop firm that makes the majority of its revenue from your success and that invests in good all round support for its traders. Be wary of firms that charge high fees and then offer very small amounts of capital to trade.

Most of all, find a firm that trades the way you want to be trading. Ultimately, there has to be a match between the prop firm’s trading strategy and the skills and interests of its traders.

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