The ins and outs of prop trading houses

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Final year students who are still scouting for a job in financial services may find working for one of the numerous independent proprietary houses in the City of London an attractive option.

If all goes well the work can be lucrative, but it's some way from working in an investment bank. Many managers who work now in prop firms, however, say they are not out to recruit potential bankers but those who want the buzz of trading their own books. That means putting one's own money on the line day in and day out.

Jobs still on offer at prop houses

The good news is that proprietary trading houses are still advertising for graduate trainees. Many offer a comprehensive graduate training programme, and once training has finished, successful traders can make a packet.

"It's not unusual for a trader to make a six-figure sum on a busy day," says James Sullivan, trader manager at prop trading house Pelican West. "There are plenty of people making that in the City."

Companies such as Schneider, MET Traders, League Traders, and Pelican West all train graduates in the art of trading financial futures products. "We cover all areas of technical analysis and fundamental analysis," says Sullivan. "A lot of the training takes place on a trading simulator."

In many cases, prop trading houses will pay you during the training process.

Working for yourself

When training finishes you will typically become self-employed and will put into practice what you've been trained to do.

Because prop trading houses don't generally allow people to hold positions overnight, most of their traders are day traders, meaning they buy and sell the same product in a matter of minutes or hours in the hope of making a profit during the short time they own it.

They trade their own money, which is typically supplemented by money from the trading house. In return for this supplement, the firm will initially take around 50% of any profits traders make. Going forwards, this may fall to 10%.

Traders therefore are paid nothing at all in terms of salary but live off the money they earn from successful trades.

However, if trades are unsuccessful, the trader loses out. The managing director of one house makes the situation clear: "If you're a day trader and you lose money, you will have to pay it back to the trader [prop house] you clear through."

Given strict risk limits, Sullivan says it's unusual for traders to lose much, if at all. "We set clear parameters and talk to individual traders about their limits," he says. "It's in our interest for people to make money."

Bear in mind, however that the US Securities and Exchange Commission warns that day trading can be 'highly risky' and lead to 'devastating losses.' According to the trading website, 70% to 90% of day traders lose money.

Who should do it?

Predictably, therefore, working as a prop trader isn't ideal for risk-averse types who fancy the relative security of a regular salary and bonus from an investment bank.

"We want competitive people who have discipline, patience, and determination," says Sullivan. "A lot of people come to us because they want autonomy. They don't want to go into a bank at 6am and leave at 6pm every day."

Bridge to a banking job?

Time at a prop trading house is unlikely to bring you any closer to a job in an investment bank, however, so be sure this is the route you want to pursue.

Simon Conyers, a consultant at recruitment firm Huxley Associates, says he sees plenty of CVs from people who've worked in prop trading firms, but banks just aren't interested in hiring them. "Investment banks just don't regard these people very highly," he says. "You might be able to move from an arcade [prop firm] into a middle office trade support role in a bank, but it would be very unusual for you to be hired as a trader."

Martyn Drage, career development manager at Reading University's ICMA (International Capital Market Association) Centre, says plenty of ICMA students have gone into proprietary trading houses, and that the career path is totally different to banking. "If you're successful, you might go on to open your own trading house," he says.

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