Prop Trading 101: How You Break In, What You Do, and How Long It Takes to Make $10 Million and Retire to Your Own Private Beach in Thailand
During my final year of university when I was recruiting for finance jobs, I never put much thought into prop trading.
But then one day I saw an interview slot listing for a mysterious “proprietary trading firm” and immediately asked my trader friend across the hall whether I should apply.
“Dude,” he said, “You can make hella money if you do prop trading. People make millions of dollars right out of school. You should go interview with them – they love technical and engineering majors too!”
Lured by the dollar signs, I went through multiple rounds of interviews and ended up winning an offer at a well-known prop trading firm – but then turned it down to do investment banking instead.
Which may have been a huge mistake.
In this new interview with a prop trader, you’ll learn exactly why I might have blundered back then – as well as:
- How to network and break into prop trading.
- What to expect in interviews and how similar they are to S&T interviews at banks.
- What you do as a prop trader, and what your average day is like.
- How much money you’ll make, and whether or not there are any exit opportunities.
Let’s get started:
The Story So Far
Q: Let’s start with your story and how you broke into prop trading – how did it all begin?
A: I didn’t follow the typical finance “track” because I was an engineer in university, went through academic research, and then did a few corporate internships.
I didn’t feel like I would make much of a difference working at huge companies, so I got more interested in finance and started looking at firms that would hire students with technical backgrounds.
Since my school was close to Chicago and since the economy was much better back when I was recruiting, plenty of companies came to campus to recruit engineers for all types of positions.
I interviewed with 3 different prop trading firms on campus, and won an offer despite having less of a finance background than the other candidates and a lower GPA (around 3.0) – I convinced them that I wanted to work there more than anyone else, and in trading they sometimes value “hunger” over academic achievement.
Q: That makes sense since traders care a lot about your “appetite” for success.
But it couldn’t have been easy to work there if you didn’t have much of a finance background – how was it when you first started?
A: I actually struggled a lot at the start – it’s a brutal environment at many prop trading firms and your experience depends 100% on what the head trader in your group is like.
As a clerk (entry-level position at prop trading firms), you don’t know what you’re doing and you’re completing tasks such as reconciling trades – so you don’t exactly get much guidance or exposure right when you start out.
After a while, I started performing better and was promoted to a junior trader after 8 months there. That can be on the low side for promotion to “real trader” status, but it depends on the size of the firm and your performance.
Q: We’ll circle back to what you do on the job in a bit, but what happened after you were promoted to junior trader?
A: I spent about 18 months there working in Chicago, and then went to London to help restructure the trading group we had in place there.
Then, less than year into that, I left to go join a colleague who had left our firm to start his own group at a small firm back in Chicago.
We did well for a few years and hired a few people there, and then my colleague took off and I tried to start another group – which didn’t go too well due to the credit crisis affecting liquidity.
Long story short, I ended up back at my original firm, and have been expanding into another new market since then.
Q: So it sounds like you’ve bounced around quite a lot, though I’m noticing one common theme here: Chicago.
Are there not as many prop trading firms in New York and other places?
A: In the US, it’s definitely concentrated in Chicago. There are a few in New York, but it’s much more institutionalized there whereas Chicago is more about market-making.
Most of the big prop trading firms are based in Chicago and are still doing really well despite the crisis, recession, and everything else that has happened.
Breaking Into Prop Trading
Q: So it sounds like one of the keys to breaking in is being near Chicago so you can network effectively.
But besides location, what else can you do to get yourself noticed and land interviews with these firms? Many of them are small, extremely secretive, and don’t even do on-campus recruiting.
A: Networking is your only option – you need to speak with someone at the firm and have him pass along your resume. Get in contact with a trader there – whatever it takes – and pitch yourself to get on the firm’s radar.
Some of the bigger firms in Chicago actually do recruit on campuses, but they tend to focus on top engineering schools and good Tier 2 schools with solid technical programs because they want math/science/engineering people rather than the usual finance and accounting crowd.
You run into more trouble with the really small firms – groups of 8 – 10 people that might specialize in something very specific such as Eurodollar options.
If they’re doing relatively well – making, say, $10 million+ per year, they have little incentive to recruit aggressively unless they’re looking to expand into a new area or unless they really need extra help.
Q: Right, but those are exactly the types of firms that many readers would target.
Those firms release almost no information publicly, so how can you even find traders there if you want to cold-call or cold-email them?
A: Your best bet is LinkedIn – even if the firm itself doesn’t have a website or lists no information publicly, people will still list the company they work at on their LinkedIn profiles. So you could go through and search for “prop trading” or “proprietary trading” and see what results turn up.
You could also go through exchange websites – they list the clearing members and you can track down people there who don’t even have an online presence.
And then you could get even more creative and search for something like “Trading LLC” on Google in a certain geography, find the full name, and use that to look for more information and look up people who work there on LinkedIn
Once you have the contacts, then it’s just a matter of following the usual advice here on cold calling and cold emailing. Just make sure you don’t cold call traders during market hours!
Q: And what should you expect in interviews? Are they similar to trading interviews at banks where you have to pitch investment ideas, answer brain teaser questions, and so on?
A: Yes, the questions are similar to what you get in trading interviews.
Generally, they ask more math questions and brain teasers in the first round because they use them as a screen to see who can perform under pressure, think on their feet, and reason their way into solutions.
One really important point to make here is that getting these questions wrong is OK – they care more about your thinking process than your answer. The worst thing to do is to freak out and apologize every 2 seconds or to second-guess yourself constantly.
In the second round, you’ll still get brain teasers but they will also move into more behavioral questions: how do you cope with stressful situations? What would you do if Random Disaster X happened?
A lot of it is figuring out what your instincts are like and how well they get along with you. As a trader, you’re glued to all 8 of your monitors all day and you spend a lot of time hanging out with everyone else there.
So not fitting in is even worse than not fitting in investment banking because you don’t go to meetings or visit clients during the day.
The most important points in interviews are to come off as confident, but not cocky, and to meet the minimum bar in terms of math and problem-solving abilities.
Q: Earlier you mentioned that you “convinced them that you wanted to work there more than anyone else” and that played a big role in landing your offer at the firm – how exactly did you do that?
A: As I mentioned, my undergraduate GPA was only around 3.0 – on the low end of all the other candidates – so although I interviewed well, I was waitlisted because other candidates still had better academic backgrounds.
They promised to “let me know in 2 weeks,” but I wasn’t satisfied with that response so I typed out a passionate email to the Partner I interviewed with and said that I would work for free and would do anything possible to get in.
I even went as far as saying that I would clean the bathrooms and do menial tasks – I would have done literally anything to win an offer.
All the other applicants were much more reserved and didn’t try anything like this, so I came across as honest and hungry, and that pushed me over the edge into winning an offer.
With this type of strategy, the key is to prove that you’re genuine – you must show off a history of this kind of passion and demonstrate how you act this way in everything you do.
A Day in the Life of a Prop Trader
Q: That’s a great story, and it goes to show how effective it is to want the job more than anyone else.
In the beginning I didn’t bother to define “prop trading” because I assumed that everyone reading would be familiar with it, but let’s take a step back and do that – how would you describe it?
A: Sure. There are a couple different types of trading, but the basic categories are agency trading and proprietary (prop) trading. With agency trading, you execute orders for clients and take a commission on each trade. The challenge there is finding enough willing parties to properly buy and sell large blocks of securities.
With prop trading, by contrast, you’re the principal and you invest your own capital in whatever way you want, within the strategies you’ve chosen and your risk limits.
Small prop trading firms can’t compete with large banks when it comes to executing trade orders for clients because they don’t have the same resources and networks at their disposal – so they focus more on coming up with trading strategies and investing in areas where there’s less competition.
Many prop trading firms focus on market-making, which is a form of trading where the company acts as both the buyer and seller for a type of security and makes money on the bid-offer spread.
For example, if an institutional investor wants to sell 200,000 shares of a stock at $10.00 per share but can’t find anyone willing to buy that volume at that price, a market-maker might step forward and offer to buy the entire block at $10.00 per share – even if they don’t yet have a seller lined up.
Then, they would aim to sell it for more than $10.00 per share to another investor who’s looking to buy the same stock but can’t find it in the volume he’s looking for.
So that’s an example of what you might do at a prop trading firm, but the strategies used go way beyond that; the line between trading at hedge funds, trading at banks, and trading at small prop trading firms starts to blur past a certain point.
Also, note that most prop trading firms focus on fixed income and commodity derivatives rather than equities – and if they do something equities-related, it’s usually index derivatives.
Q: Thanks for that example. I do want to return to the hedge funds vs. banks vs. prop trading firms point in a bit, but for now let’s keep moving forward with what you do on the job.
What’s your average day like? Can you walk us through what happens from beginning to end, the hours worked, and so on?
A: It depends a lot on your position – clerk vs. junior trader vs. Partner – and also the firm type and geography.
I’ve worked at both the clerk and junior trader levels at both big and small firms, and in both Chicago and London, so I’ll try to go through all of those without making it too confusing.
As a clerk in Chicago, I would get in between 6:00 and 6:30 AM and would start off the day by reconciling trades from the overnight European shift. Then I’d start producing position reports for all the traders showing exactly where their money went the day before and where it is right now.
The trading day would start at around 7:20 AM for those in Fixed Income, and I would spend most of my days making sure that their positions were properly updated whenever they asked for more information or needed it to make another trade.
At the end of the day, I would spend time reconciling all the trades from that day and making sure that we were set for the next day of trading. I usually left the office around 6 or 7 PM as a clerk.
As a trader, I got in around 6:45 AM (sometimes a bit earlier), and the day would start with a morning meeting to go over overnight happenings.
After that, you might go down to the trading floor itself if you work there, or you might go to your desk and start monitoring the markets and news, and to begin making trades.
If you’re working on the floor, you’re busy making markets all day long (similar to the simplified example I described above), but you may also be talking to other traders on the floor or the rest of your team to get a pulse on the market and figure out who’s making different trades.
At the end of the day, everyone gets together to discuss the major trades that happened that day and who might have been behind them – at a large prop trading firm you have good market insight because you get exposed to everyone from major institutional investors to smaller firms and individual investors.
We might also talk about market-making overall, upcoming economic events and announcements, and so on.
If you’re senior – a Partner at a prop trading firm – you might leave at 3 or 4 PM in Chicago because the Fixed Income pits there close at 2 PM.
As a junior trader, you might be there until more like 6 – 7 PM because you have to do more work and analysis after the market closes.
Q: Awesome, thanks for that detailed description of both roles and the hours involved.
What about your experience at the firm’s group in London? Was it roughly the same hours and tasks there?
A: The hours were worse in London because we had to monitor both the European and American markets.
So as a trader, I got in at around 6 AM – and even earlier than that as a clerk – and I would trade straight through until 6 PM to catch both markets. I usually left around 7:30 PM, so I was at work anywhere from 12 – 14 hours per day, with most of my time spent glued to my screen.
Q: Sounds pretty brutal. I guess the message is, “Try to avoid trading multiple markets, if possible, or you may develop a monitor tan after enough exposure.”
What about your experience at the smaller prop trading group you started with your colleague?
A: Since it was a smaller environment, the hours were much more variable. I could put in as many hours as I wanted depending on what I wanted to get out of it and what my goals were.
When I first started, I woke up at 4:30 AM and got in by 5:00 AM every day to take advantage of a certain market we were getting into; I would go to sleep, wake up again to trade markets at night for a few hours, and then go to sleep again and wake up really early once again.
Small firms can sometimes be more flexible with your working arrangements, and I’ve seen traders win permission to trade from home, take more vacation days, and take time off when they want.
As long as you make a lot of money, they don’t care too much about strictly monitoring you.
At big firms, by contrast, many people only take 1 week of vacation time per year (outside of the major holidays), and your schedule is much more dependent on your seniority at the firm.
Q: Very interesting to note. I don’t think this “work from home” concept would ever fly at a bank or PE firm, but it’s great to take advantage of if you can get it.
How else is life different at a small prop trading firm vs. a large one?
A: It’s a much different environment in terms of personal risk.
At a bigger firm, even if things don’t go well in your group and your P&L doesn’t look great or you lose money, you still make at least base salary and you’ll get some form of bonus. And if liquidity dries up or the spreads get too tight, you can always move to another group at the firm.
So there’s less risk and more security for you.
You make much bigger trades as well, so the mentality is quite different – a single trade there might actually move the markets, and you can gain more insight into why the markets might be mis-priced because your counterparties are often large hedge funds.
Just as one example, when I worked at the large prop trading firm, I would know whenever Brevan Howard (a huge force in Fixed Income, options, and futures) was doing something. After a while, you start to recognize the size and style of trades a firm like that makes, which gives you more color on the market.
At a smaller firm, you don’t have that kind of insight so you must be more careful with the positions you take and the amount of leverage you’re using. If the spreads move way out of line, for example, and you don’t know why or you don’t have enough capital, you might need to close out your positions.
Prop Trading vs. Hedge Funds vs. Sales & Trading
Q: You just went over the differences between prop trading at small vs. large firms, but what about trading at prop trading firms vs. hedge funds vs. sales & trading at bulge bracket banks?
Obviously the amount of capital under management is a lot different, but what about the trading strategies themselves and the markets you trade in?
A: Besides the capital under management, the biggest difference externally is the return on capital.
At prop trading firms, you could easily get returns of over 100%, and it might be more like 200 – 300% depending on the firm.
But with a larger capital base it’s impossible to do that. If you had $20 billion under management, a 200% return would turn you into a $60 billion firm, and you couldn’t replicate the same strategies year after year.
You might see tens of millions or less invested in prop trading firms, and the much lower capital base explains why they can earn such high returns.
The markets they trade in are also much smaller – if a prop trading firm had $50 – $100 million invested in a specific product like natural gas options it might be the biggest market-maker (but not necessarily the biggest player) in the space.
Hedge funds, by contrast, tend to be much larger and focus more on directional trading (simply taking long or short positions and betting on the security’s future price) rather than market-making.
You could mirror some of the strategies a hedge fund uses at a prop trading firm, but generally the trading styles are quite different.
With sales & trading at banks, beyond the addition of agency trading, you’re once again managing much larger amounts of capital and you tend to be more conservative with strategies and risk management.
You invest in much bigger markets, so hypothetically you could keep growing and growing without needing to expand into different areas as a prop trading firm would.
At a prop trading firm, if you got a 200% return in one year and therefore tripled your capital, you would have to re-deploy it (whatever’s left after the traders have taken their cut) into different areas, push new products, and so on.
I’ve seen that happening more and more over the past 10 years – many firms that used to focus just on equity options or fixed income options have been diversifying and getting into other markets such as grains, energy, and so on.
Q: So it sounds like they’re different because of the capital under management, the strategies used (directional trading vs. market making vs. agency trading), and the markets they trade in.
Would you recommend starting out in prop trading rather than at a bank or hedge fund? What are the trade-offs?
A: I’d say it depends on your risk tolerance and personality.
If you go the prop trading route straight out of school, your exit opportunities are extremely limited and you’re a bit screwed if you decide that it’s not for you.
So I wouldn’t recommend going into it unless you love trading, you dream of the markets, and you couldn’t see yourself doing anything else. You can make a ton of money, but it’s not for everyone and some people find they don’t like it.
It’s not even particularly easy to move from a prop trading firm to a hedge fund or bank because the styles of trading are so different. You would be overly specialized unless you happen to find a hedge fund that uses a very similar strategy.
So if you’re more uncertain of what you want to do, it’s better to start out at a large hedge fund, or even better yet, at a bank. Trading still gives you fewer exit opportunities at both of those as well, but at least you’ll have a brand name on your resume and you can move around to other industries more easily if you haven’t worked there for too long.
Q: So I’m guessing it’s not too common to move from a bank or hedge fund to a prop trading firm, either?
A: Traditionally, no, because the styles of trading are so different.
But following the financial crisis and the increased regulation, more traders from banks have been coming over as banks have cut back on the prop trading business internally.
Most of the time, though, they’ve been more senior people with established track records as opposed to junior traders – they went to the top-tier Chicago-based prop trading firms because they were offered lots of capital and the freedom to do what they wanted there.
The most common path on the hedge fund side is to start your own fund or join another one at a much more senior level, so you rarely see people move over to the prop trading side.
Q: Beyond just the differences in trading strategies, do you think any of that has to do with the cultural differences at banks vs. hedge funds vs. prop trading firms?
A: That’s a good point, but I’m not sure you can draw any definitive conclusions there.
Just like trading in other areas, the culture at prop trading firms is male-dominated with lots of yelling and stress all day long. Sometimes that convinces people who would otherwise be good traders to decide against doing it.
You tend to see that type of culture at banks as well, though it varies by group, and it’s almost impossible to categorize the culture at hedge funds because each fund is different and it depends on the background of the people there and the strategies they use.
Pay, Exit Opportunities, and More
Q: Now let’s turn to the question that everyone’s really curious about: how much you get paid in prop trading.
I’ve heard all sorts of stories, from people receiving decent base salaries at larger firms with bonuses based on your P&L to people receiving no or very low base salaries with pay 100% dependent on performance.
What should you expect, and how does it change as you move up?
A: Unfortunately, there’s no quick and easy answer to this one. Here’s what I can tell you about the pay at different levels:
At Chicago-based firms at the lower levels (clerks), the pay is very discretionary and you’ll likely earn a small salary in a tight range based on how good you are.
Ballpark, maybe around the same as the base salary that an investment banking analyst or sales & trading analyst at a bank would earn; somewhere in the $60-75K USD range.
As a “junior trader,” it’s still discretionary and you don’t get to negotiate a percentage of your P&L most of the time, so it’s random and very dependent on the generosity of the Partner in your group.
At one of my firms, the Partner was notoriously bad with profit-sharing and always screwed over the junior people even if they made more than their fair share of money for him; but another group had a very generous Partner that paid everyone well, even at the junior levels.
I hesitate to give exact numbers for junior traders at prop trading firms because it’s so dependent on performance and your group, but here’s what you might expect with good performance:
- Year 1: $75K
- Year 2: $100K
- Year 3: $200K (If you’re a producer, much less if you’re a body)
- Year 4: $350-400K (if you’re a solid producer and your group does well, but highly variable)
- Past Year 4: It becomes very dependent on group performance and what you’ve brought in personally.
And it might be lower or higher than these figures depending on all the other factors above – that’s a very wide range, but unfortunately compensation data is difficult to find for prop trading firms.
Despite rumors to the contrary, you’re not going to make $1 million+ as a junior trader unless you’re a star in a group that is outperforming.
Q: So how often does a group do “exceptionally well?” And what kind of numbers do you need for that to happen?
A: As a quick anecdote, I knew of a 1-person group (1 seasoned trader working with 1 clerk) that made $20 million one year. So in that case, the trader would have definitely pulled in a 7-figure payday.
If you were in a bigger group and that group made close to $100 million, let’s say $80 – $90 million, you might also earn that kind of money even if you were more junior.
I wouldn’t say this kind of performances happens “often” – it’s more common in bull markets and when liquidity is high. You don’t see it as much post-crisis, though some groups do perform that well every year.
Q: So you shouldn’t hold your breath waiting for 7-figure bonuses as a junior trader – what about when you become a Portfolio Manager or Partner?
How long does that take, and what type of pay can you expect?
A: At that level, your pay structure shifts and then you can negotiate a percentage of your P&L for your bonus.
The timeframe to make Partner varies a lot, but you can do it extremely quickly (a few years) if you have the right numbers and you make enough money. I’ve seen people do it with 3 years of experience – sometimes a trader will leave, or the firm is expanding into a new product, and if you’ve done well enough they might place you in that role.
Partners might receive 25% – 40% of their P&L for their bonuses. So if you’ve made $5 million at that level, you could easily get a $1 – $2 million bonus.
This compensation may also be tiered, especially at smaller firms – you might make a certain percentage on the first $500K or $1 million of profit, and then the percentage steps up in increments after that.
Since you’re trading much bigger positions at large prop trading firms, it’s easier to earn a high profit there – but you also have to split it among more people in your group, so you don’t necessarily make more as an individual.
Also at larger firms, the pay for everyone outside the portfolio manager / head trader is more discretionary and it’s up to the PM to award amounts based on personal performances – so you may not see the percentages quoted above.
Q: So what might you expect at a smaller prop trading firm? What are realistic numbers for a group that’s doing relatively well?
A: A smaller group or firm that’s doing well might have 10 traders total, with 6 guys on the floor and 4 on computers upstairs.
They might make $10 million in a given year trading something specific like Eurodollar options, and then split the P&L between everyone there – so the Partner(s) might earn million-dollar paydays, with the rest of the traders getting somewhere in the mid to high six-figures depending on their seniority and individual performances.
At smaller firms you can sometimes extract better terms for your bonus and negotiate your way into receiving a higher percentage of your P&L. If you have a proven track record and strategy, smaller prop trading firms may fight over you and some may offer you better percentages or more capital to entice you into joining them.
Q: Finally, I have to ask the elephant-in-the-room question here: we’ve been focusing on the “P” part of that P&L and assuming that you actually make money.
What happens if you lose money – does that just mean you get a $0 bonus? Do you get fired due to poor performance?
A: It depends a lot on the size of the firm, how long you’ve been there, and your performance in past years.
Generally you are safer at big prop trading firms if you have one bad year, especially if you have a solid track record from the previous years.
At really small firms, you might not be so lucky – unlike large banks where there’s a tolerance for losing money at first, in prop trading it’s 100% about your performance.
So the reality is that yes, if you lose money at a small prop trading firm, you have a high chance of being let go.
In terms of bonuses, you should expect no bonus if you’ve lost money, regardless of whether you’re at a big or small firm.
Q: So let’s continue playing devil’s advocate and say that things don’t work out for you in prop trading.
What happens next? You mentioned there aren’t good exit opportunities, but surely failed traders must go on to do something else, right?
A: A few options I’ve seen people pursue:
- Some people joined the finance departments of big companies.
- A few went to the back office at large banks.
- Some have applied to MBA programs to switch careers.
- Some have become financial advisers or gone into something like private wealth management.
Note that not all of these former co-workers “failed” at trading – some of them just didn’t like the work itself, couldn’t fit in with the culture at the firm, or decided they wanted to do something else, and left voluntarily.
If you get fired, it’s really tough to get hired at another firm.
Most prop trading firms prefer to hire organically and recruit people right out of undergraduate with no work experience – they only “poach” traders from other firms when those traders have been extremely successful.
So that is a downside to prop trading, and one of the risks you need to consider.
Q: Right. But since you’ve done quite well over the past few years, you wouldn’t have to worry about any of that – I’m guessing you’re planning to stay in prop trading for the foreseeable future?
A: Actually, I’m also interested in switching careers at this stage.
Although I’ve done well in trading, I’ve also gotten more interested in investing in entire businesses and learning how companies work as opposed to just trading options or commodities. That happened partially as a result of investing my own money and becoming more curious about business in the process.
So right now, I’m applying to top MBA programs and I’m planning to use that to transition into more of a corporate finance role, whether in banking, PE, or something else closely related.
Q: Interesting. I guess that just goes to show you that even if you’ve done well and enjoyed a particular industry, you may still switch to something completely different these days.
Thanks again for taking the time out to chat, and good luck with those MBA applications!
A: No problem, it was my pleasure.
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