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Prop Shops and Trading Schools Raise the
Bar page one | page two This isn't the pick-up basketball game at the local YMCA. This is where Shaq would teach Lebron James how to play the game if they were professional traders. This is where full-time traders bring their A-game to Wall Street - every day. Proprietary traders are professional traders hired by a firm to trade that firm's money. From equities to futures and options trading, serious traders are finding their way into proprietary trading shops and into day-trading centers across the country. It would be inaccurate to call it a rising tidal wave of demand for equities, although there is a swell among futures trading shops. The prolonged bear market in stocks has kept the lid on the trader mania that took hold and built a loose network of day-trading shops around the country in the '90s. Rather it's an evolution that's left a handful of proprietary equity trading firms such as Schonfeld Group in New York. Schonfeld has grown from about five traders in 1988 into a powerhouse proprietary trading operation with 450 proprietary traders and a separate division for 300 retail traders who trade for their own accounts. Combined, the firm trades about 130 million shares per day. Right now, the timing may be just right for traders to make the leap from active to professional proprietary or even a pro-day trader, but many firms are looking for the next breed of proprietary trader. "The interest level in equities trading today on a scale of one to ten is probably a one or a two," says Steven Schonfeld, chief executive officer of Schonfeld Group. "Three, four or five years ago, it was a nine or a ten. Obviously, like retail customers who have bad timing for when they get in and out of the market, It's no different for employees who want to trade as a career. When it's a bear market, trading is thin, volatility is low, and there aren't the 'easy' money-making opportunities, that's the best time to get in." For Schonfeld - be it proprietary trader or professional day-trader - trading the tough markets will help mold the next class of top traders. "When people got in during 1999 and 2000, it was the worst time," Schonfeld said. "Why? Because it was such an easy market, you could take an amateur and make some money. But they'd learn the worst habits and think they didn't need to work on their trading. It was really the worst money they ever made because it ended up doing damage to their careers." What has emerged in these darker days on Wall Street is a number of professionals from outside the trading world who are dedicated to making a career change. Many have little or no experience in trading stocks, futures or options and are looking for the right firm to lend then insight and a trading terminal. That suits proprietary trading firms just fine because the people knocking on their doors today usually are not part of the easy money markets of the 1990s. Showing 'Em the Ropes Even though there are a million so retail and on-line accounts, the estimate for the equity industry is that there are only about 6,000 licensed traders in the U.S. Bright, Schonberg and other proprietary trading and day6-trading teachers say they look for smart, competitive and flexible students. Bright Trading has about 500 proprietary traders across the country and educates about 250 people each year that may or may not join the firm. Half of those students never trade, Bright says, once they see first hand how difficult trading can be. There are two distinct profiles of applicants today - first, professionals from other industries that perhaps have found themselves in a jobless recovery and, second, the college student or recent graduate. "Young people without bad habits will do much better, we're finding, than the stock broker or someone who lost his money," says Don Bright, trader and director of education with Bright Trading. "Stock brokers tend to think they have an edge on the markets when they haven't even been on the trading floor." One of the key elements of the Bright education program is learning how the market's gears work once an order is entered - such as how orders are really matched and terms like time priority and parity. "You learn so much more as a clerk on the trading floor as opposed to learning trading as if it were a video game," Bright says. "There's been so much of that over the last couple years where people call and say, "How fast are your computers, and what kind of platform do you have?" I say, "Our computers are as fast as anyone's, and all you can do on it is buy, sell or chance." I downplay it a little bit because I want people to understand what goes on after they push the button." Like most proprietary trading firms, Bright says traders slowly earn their way to trading more money. The more they make, the more they are given to trade and are allowed to keep the profits. Other firms offer a base salary and divide a percentage
of the profits. Still other take a sales approach and offer a salary
until the trade establishes a track record. From there, the compensation
depends on trading success or failure. For some proprietary trading
firms, it's not uncommon to pay a base salary of about $30,000 for
the first six months with trading on simulated markets, followed
by a 50-percent take on read trading profits thereafter. Depending
on the success of the firm, a trader's take can potentially rise
to 70 percent. That's a big change for Schonfeld. Five years ago, 80 percent of his proprietary traders had no prior trading experience, nor were they necessarily computer or math wizards. Today, Schonfeld is building up his "Black Box" trading division with people who have mathematical, trading or programming backgrounds. Schonfeld's retail division also focuses heavily on training and trading tools for its day-traders. Those traders are provided a proprietary trading program that helps pick out stocks according to the trader's methodology such as price moves, volatility and other variables. Those traders also receive monthly report cards that focus on strengths and weaknesses. Cary Gruber, a day-trader who has been trading his own account at Schonfeld since August 2003, says he was able to make the leap from stock broker to day-trade with the help of Schonfeld's software and trading in a trading room with 90 other traders all aiming to win. Today, Gruber trades between 400,000 and 500,000 shares per day. "Trading in a community, in an office, is something I'd recommend highly to anyone who is doing this," Gruber says. "Trading on the Internet on E*Trade a couple trades a day is not day-trading, or professional trading. We're trading stocks all day long, and I'm surrounded by maybe 40 guys who are a close-knit group trading together. You have 80 eyes looking at the screens, focusing on different stocks in different sectors. So it helps to have some other eyes out there pointing out something I might have missed to get me back on track - so many people with different backgrounds and a lot of information that is so helpful to the trading environment. It's not people talking up stocks. It's really informational." But Gruber is the exception for day-traders. Even with training and all the latest trading software, the vast majority of day-traders do not make it. David Norman, director of market technology at Illinois Institute of Technology, discourages his students from learning via the equity day-trading route. "I kind of warn my students against that because it's a different kind of fish and a different way of accessing the market," Norman says. "They are not direct access markets, apart from the ECNs. And you have to go through a broker, whereas in the futures market you can have a direct line to the exchange and have the same opportunities as everybody else. You just have to be better." Regarding proprietary trading firms, Norman added that Schonfeld's more math-minded selection process is becoming the norm. Over the past year, the IIT program placed only four or five students out of 200 with proprietary trading firms, all futures prop firms. Norman qualified that by saying many students don't pursue careers as prop traders, but adds only about 20 percent of those who would like to be work in a proprietary trading firm were placed. And once traders get there, there is no guarantee they will stay on. Bright estimates that about 15 or 20 traders out of 100 will still be trading two years later. Firms are getting more sophisticated about who they bring on board. Some proprietary trading shops are using software that breaks down an individual's abilities across multiple trading, math, computer skills and psychology categories. page one | page two
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