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A quantitative prop trader reveals all about his job

Prop trader, possibly a quant (Photo credit: Wikipedia)

Prop trader, possibly a quant (Photo credit: Wikipedia)

For its excellent series of banking talking heads, the Guardian has interviewed someone claiming to be a, “quantitative prop trader,” if you’re interested in working in trading, you may be interested in the fundamentals of his role – which we’ve extracted below.

(Bear in mind, that the ‘Volcker Rule’ means many US investment banks have pulled back from prop trading. However, in some cases, this has simply encouraged them to move their prop traders into their asset management arms instead. )

This is how the Guardian’s prop trader explained his role:

1. The bank gives him money to make money

“There are two kinds of traders in banks. Market-makers use their client’s money to make money for those clients, taking a commission. Then there are prop traders like me. We use cash given to us by the bank to make money for the bank.”

2. As a “quantitative prop trader,” he builds up a mathematical strategy based upon a hunch and an investigation of whether that hunch has proven correct in the past

“I will have an idea about a pattern in the market,” he says. “I might look at the ways unusual rainfall in Argentina translates into higher wheat prices.”

“That’ll be my ‘idea’. Next is statistical analysis, where I go back to historical data… I run analyses and if the pattern holds, I work out the threshold at which we should buy and then sell these shares.”

3. He then looks at the probability that his theory will hold in future

“How likely is the pattern to play out? One in three, one in four? You need a strong correlation.”

4. He then looks at the likelihood that the implementation of his trading strategy will prevent it from working

“Another thing to examine is whether the trade I am studying would, when executed, ‘move’ the market; so will the very price of the share be affected by my buying it?”

5. He considers whether his strategy would be viable within the limits imposed upon him by the bank

“Then there are the trading limits; I can only take this much risk and my strategy has to accommodate that. People may think of us as gamblers, we are actually very cautious and careful.”

6. He says success as a quantitative prop trader is about having the ideas, doing the historical analysis and working out a viable trading programme that can exploit historical patters to make money

” By anticipating logical reactions to events impacting a particular share, commodity or financial product, I get ideas for trading. I mine the data for statistical confirmation, work out a trading programme to exploit those patterns and when the chance of actually making money on the programme looks good enough, we go for it..”

7. He says prop traders are analytical and deliberative; flow traders are quick thinking and decisive

“A good market-making trader will have great instinct for how the market works, and is a very quick thinker and decider. Quant traders like me take more time: we are more rational and academic.”

8. He says you’re better prop trading in a bank then a hedge fund

“Hedge funds work with other people’s money, and they can suddenly go into a panic and take their money out. That kind of thing can really wreck your strategy… A hedge fund investor would get very alarmed by a negative performance spanning over a few weeks and even months. Not a bank. But the bank would be alarmed if you have large gains one day and large losses the next one.”

9. He says prop traders are paid a percentage of their profits

“My salary is £150,000 a year plus bonus. This bonus can dwarf my salary and be multiples higher. In this business you can exactly pinpoint profits, and people like me get paid roughly a percentage of those profits.”

10. He says prop trading is a great career 

“Since performance is measurable, prop trading is incredibly meritocratic. I work with some of the smartest guys in the world. It’s enormously challenging and edgy and exciting. Once a year the bonus comes in and that’s very nice. But do I stay in this business for the money? No way. If I weren’t happy every day, I’d leave. I have options. For somebody with my mindset this is the best job in the world.”