People talk a lot about prop traders but many of them know and many don’t know about them. Last night I was reading an article in The Guardian an interview by Quant trader recalled my short experience that I lived as a Prop Trader.
We play with the money that’s the shortest version what a prop trader do.There are two kinds of traders in the financial institutions.
1) Market-makers use their client’s money to make money for those clients, taking a commission.
2) Then there are prop traders like me beg you pardon I was. We use cash given to us by the bank to make money for the firm.
Prop traders have more freedom as there’s no client telling us what to do. On the other hand we have more responsibility because it’s not the client’s money but our own money. Institution don’t like to advertise this, but prop traders are quite profitable in terms of income generated per head. This is very useful for financial institutions in times like these.
Prop traders come in two varieties, too. The ‘pure’ prop traders have a view on the market that day and act on that. ‘Quantitative’ prop traders have a systematic view, meaning they build strategies and then trade them longer term on the market.
Here is an example of a pure prop trading idea: Germany refuses to print extra money until the weaker euro countries structurally reform their economies. Only then will Germany solve the crisis by flooding the markets with money, creating inflation that will undermine the euro’s value and in turn help Germany’s export industry. The longer Germany waits, the more money it will have to print to solve things.
That would be a ‘view’ and it will give a pure prop trader ideas for a trade. This example is more ‘pure’ than ‘quant’ as it has too few chances to occur several times over the next years – in other words, there is nothing really systematic.
A good market-making trader will have great instinct for how the market works, and is a very quick thinker and decider. Quant traders take more time, they are more rational and academic.
Buying something on the financial market is called ‘holding a position’. There’s enormous regulation surrounding trading. In commodity trading (rice, oil, grain) you cannot hold more than a certain percentage of existing contracts in that commodity – to make speculation harder.
“The greatest misunderstanding about prop traders? That they’re evil. What outsiders are concerned about is speculation; if you trade large enough volumes you begin to impact the market itself, you ‘move the market’. We would never consciously try to raise the price of, say, rice, and starve children in China. Quite apart from the morals, it is actually very difficult to make a profit out of that. You drive up the price of something by buying more and more of it. The thing is, players in the market are going to notice that. And so they will quote rapidly higher prices to you since they realise that you want to buy a large chunk of the overall market with all your money. It is absolutely forbidden to do a quick in-and-out when you’ve pushed up the price yourself. It’s called price manipulation and regulators are really strict about that, you get sanctioned even if it happened by mistake and was really unintentional.
I did wrote couple of articles n the past