by Brian DeChesare Comments (2)

Proprietary Trading: Careers, Recruiting, Salaries, and Top Firms

Proprietary Trading

If there’s one career that attracts both hardcore math/finance people and 10-year-olds who play Fortnite at night and trade stocks during the day, it’s proprietary trading.

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity.

It’s arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you’ll earn some percentage of it.

And if you lose money, you’ll be fired.

We’ll cover the full career, including the pros and cons beyond compensation, but let’s start with some definitions:

What is Proprietary Trading (“Prop Trading”)?

Proprietary Trading Definition: In proprietary trading, traders buy and sell securities using the firm’s own money to make a profit; the trading may be directional (betting that a security’s price will go up or down) or market-making (acting as both the buyer and seller of securities and making a profit on the bid-offer spread).

Prop trading exists at hedge funds, asset management firms, commodities companies like Vitol and Glencore, and small/independent trading firms – and it used to exist at large banks before the 2008 financial crisis.

In practice, “prop trading” usually refers to the smaller, independent firms that focus on market-making.

For example, if an institutional investor wants to sell 200,000 shares of a stock at $10.00 per share but can’t find any buyers at that price, a market-maker might 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 the entire volume for more than $10.00 per share to profit from the trade.

For more examples, see the articles on fixed income trading and equity trading.

Types of Proprietary Trading Firms

There are three main types of prop trading firms:

  1. Churn and Burn – At these firms, you pay thousands of dollars for “training” and the privilege of trading a small amount of capital. You get no base salary, but you keep a huge percentage of your profits (well over 50%). This one is for day traders who want to “go pro,” which means you should avoid it at all costs.
  2. Slightly More Legitimate – These firms will give you a bit more in real training but also charge you a monthly fee to access their data and trade. The monthly fee is often thousands of dollars, so you start each month “in the hole.” You still keep a huge percentage of your profits and still earn no base salary.
  3. Legitimate Prop Trading Firms – These companies pay you a base salary and benefits, give you training, and place you in a team that lets you grow and develop. They recruit directly from universities, and they poach experienced traders from other firms. Employees keep a much smaller percentage of the profits at these firms (~10-30%), but it’s also a sustainable career that isn’t designed to exploit you.

We’ll focus on the third category of companies – Legitimate Prop Trading Firms – in this article.

By pooling resources, these firms give traders far more capital to use. Collectively, they also generate a much higher volume of trades, which can result in better rates with exchanges.

Traders at these firms also have access to much better technology infrastructure, algorithms, and data than ones who work independently.

Available Jobs at Prop Trading Firms

The main jobs at prop trading firms are:

  1. Trader – You buy and sell securities and manage risk, either based on a model/software/automated approach or intuition and judgment… or a combination of both.
  2. Quant Researcher – You come up with the mathematical models for trading algorithms and strategies.
  3. Developer – You implement the researchers’ models and write and maintain the code that lets the traders do their jobs.

And then there are also back office and support functions, such as operations, finance, compliance, and HR.

We’ll focus on the first category – Traders – in this article because the others could be completely separate articles.

Some firms also divide Trader roles into “Discretionary Trader” and “Quantitative Trader,” while others combine them or offer only “Quantitative Trader” roles.

The line between these jobs has become blurry, as Traders increasingly need to know programming to work with Researchers and Developers.

Prop Trading vs. Hedge Funds

Hedge funds raise capital from outside investors (Limited Partners), while prop trading firms do not.

And that single difference creates many other differences:

  1. Prop trading Partners can take a much higher percentage of the profits for themselves.
  2. The much smaller capital base (tens of millions up to hundreds of millions), means that it’s possible to earn extremely high annual returns (100%, 200%+, etc.).
  3. Prop trading firms can be more independent and often operate in smaller/niche markets that institutional-level firms avoid.

The styles of trading are also quite different because most prop trading firms make money from exploiting small pricing inefficiencies (market-making), while most hedge funds bet on security prices going up or down.

Algorithmic trading and quant strategies have become increasingly important for both firm types, but they’re arguably even more important in prop trading (see below).

Prop Trading vs. Sales & Trading at Large Banks

Although both fields involve market-making, sales & trading is more about serving clients of the bank and executing trades on their behalf.

Also, “prop trading” in the directional sense barely exists at large banks anymore.

They can still take their own positions for risk-management purposes, but not to earn a profit (with a few exceptions).

Traders at large banks also tend to work in broader markets with more volume, as they have far more capital to deploy.

Finally, the work environment and culture are much different because large banks are more heavily regulated, and office politics is more prevalent.

Just as one example, bonuses at large banks used to be based on a simple percentage of your P&L, but the process is now more “complex.”

Wait, Do “Discretionary Traders” Still Exist? Isn’t It All Automated Now?

Reading everything above, you might now be asking, “I thought all trading was becoming automated. Why do human traders even exist?”

The not-so-short answer is:

  1. Yes, a lot of trading is automated via software that calculates the Greeks, inputs market data, and quotes bid-ask spreads.
  2. However, human traders still need to tweak algorithmic parameters, manage risk and hedges, and find new opportunities.
  3. The degree of automation varies based on the product; equities are highly automated, while options use a mix of automated and manual trading.
  4. And different prop trading firms do it differently, with some acting more like software companies and others acting more like tech-supported trading firms.

All that said, “Trader” and “Developer” are still distinct roles at these firms.

Even if you’re a “Quant Trader,” you’ll still be doing less programming than the full-time Developers.

Developers get more job security and less daily stress, but their compensation is also lower.

The Top Proprietary Trading Firms

There are dozens (maybe hundreds?) of prop trading firms, so I’m not going to attempt to list them all here.

It’s also difficult to produce an exact list because some hedge funds use similar strategies, and the dividing line isn’t always clear.

For example, large hedge funds like Citadel and D.E. Shaw have their own “prop trading” groups and may use strategies similar to those of much smaller trading firms.

Among smaller/independent market-making firms, some of the top names include Jump Trading, Jane Street, Hudson River Trading (HRT), Tower (TTG), DRW, Optiver, Five Rings, Susquehanna International Group (SIG), TransMarket Group (TMG), Akuna, and IMC.

And then there other large/public entities that do a lot more than just prop trading, but which also have a presence in the market, such as Virtu [VIRT].

Most of these firms focus on “high-frequency trading,” though some, like HRT, use “mid-frequency trading,” where the average holding time is several minutes, and some positions are held overnight.

Most of these firms above have anywhere from a few hundred employees to 1,000+, so they’re several orders of magnitude smaller than the bulge bracket banks.

Besides different strategies and markets, they also differ based on the degree to which they use “trading” vs. “technology” to make money.

For example, HRT is more of a technology firm that happens to trade financial products, while Jane Street still has human traders (though they’re labeled “Quantitative Traders”).

Prop Trading Hours and Lifestyle

The hours in prop trading could be described as “normal-ish, but very intense and stressful.”

The average is probably 50 hours per week, though this varies by group, firm, and seniority.

The nice thing about trading is that if you produce, your hours don’t matter.

All the firm cares about is your P&L – you don’t get a higher bonus for working 10 extra hours.

The bigger issues are the markets you trade and your geographic location relative to those markets.

For example, if you’re in London, but you cover both U.S. and European markets, your lifestyle will be bad because you’ll have to wake up at a normal time, work European hours, take a break, and then trade U.S. markets that are 5-6 hours behind.

So, you might be working more like 12-14 hours per day rather than 8-10.

If you’re a junior trader, you’ll also have to stay after the market closes to do wrap-up work.

Your day will usually start with a morning meeting to go through overnight happenings.

Then, you’ll read the news and start trading once your markets open.

If you’re in more of a discretionary role, you’ll spend time doing the buying and selling and talking with other traders to get ideas.

If you’re more of a “Quant Trader,” then you’ll spend time tweaking trading parameters and working with the developers and quants to come up with more efficient strategies.

You tend to be busiest at market open and market close, with a lull in the middle of the day.

After the market closes, everyone gathers to discuss the major trades, who might have been behind them, and overall market activity and expected events for the week.

Prop Trading Salaries and Bonuses

The general hierarchy in prop trading goes like this:

  • “Clerk” or Assistant Trader
  • Junior Trader (you usually start at this level right out of undergrad)
  • Senior Trader
  • Partner

If you’re working at a legitimate prop trading firm as a trader, then you should expect to start at between $100K and $200K USD in total compensation (as of 2020).

Base salaries are slightly over $100K, and bonuses are usually 50-100% of base salaries.

Some top firms might even offer total compensation north of $200K, but it depends on the market environment and your performance.

If you lose money, you receive no bonus and will eventually be fired if you keep underperforming.

Once you move beyond your first year, if you perform well, your compensation at a top firm could increase to the $200K – $500K range.

Senior Traders often earn between $500K and $1 million, and Partners can earn over $1 million per year.

Base salaries do not necessarily change that much as you move up, so most of these gains come from increased bonuses.

That also means there’s a huge difference between good years and bad years – your total compensation might be ~5x higher in a good year.

The big difference with seniority is that Partners earn a fixed percentage of the group’s P&L, so their bonuses are predictable.

But until you reach that level, your bonus is somewhat discretionary, and some groups are more generous than others.

Prop trading compensation may not seem that much higher than investment banking salaries, but it offers two distinct advantages:

  1. Progression can be much faster – You’re not going to earn $500K by your third year in IB, but it’s possible in prop trading if you are very good. Some traders make it to the Partner level in only a few years if their performance warrants it.
  2. Cash payments – There are no stock-based or deferred bonuses, so you earn everything in cash. That doesn’t matter at the entry level, but it makes a big impact as you become more senior.

Recruiting: How to Get into Proprietary Trading

Most traders at top firms have a background that looks something like this:

  • Education: Undergraduate or Master’s degree in math, physics, statistics, computer science, or engineering from a top school, or, potentially, a lower-tier university with a solid technical program (e.g., a public state school in the U.S. with a good engineering ranking). Good grades help, but they’re not quite as important as they are in IB recruiting.
  • Experience: Most traders hired into entry-level roles come directly from degree programs with little-to-no full-time work experience, but they’ve usually had internships in trading, asset management, or something else related to the public markets.
  • Qualities: Entry-level traders need to think quickly, stay calm under pressure, have a thick skin, and quickly correct their mistakes. If you get stressed out easily from deadlines and other time pressure, this is not the job for you.

There are exceptions, and English Literature majors and students from non-target schools get in as well – it’s just more difficult and requires more networking.

To be an “ideal candidate,” you need to show that you’re hungry to succeed in trading.

Drive and raw ability tend to trump credentials and GPA (up to a certain point).

As an undergrad, focus on the following points to break in:

  1. Build a track record – Get internship experience, trade your own account, and learn the mental math, probability, and programming that they’ll test you on in interviews. C/C++ and Python are the most useful languages, but specific languages matter less than the concepts.
  2. Network – Especially if you’re at a non-target school, find prop trading firms on LinkedIn, look up professionals there, and email them to introduce yourself and ask about their careers. All the normal networking and informational interview advice applies.

Prop Trading Interviews: What to Expect

Yes, you’re going to get a lot of mental math, brain teaser, and probability questions, so be prepared for all of those.

A few good resources to get started are:

They could potentially ask you questions about options and other derivatives, such as how Delta and Vega change when Characteristic X of an option changes.

But it depends on how you present yourself – if you walk in with previous experience or claim this knowledge, expect to be tested on it.

If not, then they’ll probably stick to the math, brain teaser, and probability questions.

Behavioral questions will also come up, but they’re more about handling stress and emergencies and less about your leadership abilities.

You should not worry about:

  • Accounting, corporate finance, valuation, and M&A/LBO modeling – these do not matter in prop trading.
  • “Real math” (i.e., subjects beyond calculus, linear algebra, and statistics). They are not going to ask you to prove Fermat’s Last Theorem or solve one of the Millennium Prize Problems.

If you’re applying for more of a Quant Trader role, you should expect programming questions and case studies as well.

There are dozens of websites and books you can use to prepare, but a few recommendations include Interview Cake, InterviewBit, LeetCode, Coderbyte, HackerRank, and Codewars.

I’m not sure if there’s any service specifically for coding exercises at finance firms, but a few of these sites may have a “fintech” category.

Exit Opportunities

And now we arrive at the biggest downside of prop trading jobs: the exit opportunities are not so great.

The skills you develop in this industry are so specialized that you cannot use them in most other environments.

It’s not even that easy to move to a hedge fund or large bank because the styles of trading are so different; a long/short equity fund doesn’t care about trading every second to make a market in some obscure derivative.

You might be able to do it if you find a group with a similar trading style, but it’s still a challenge.

So, your main options are:

  • Move into another group at the firm or join a different prop trading firm.
  • Go to a “normal company” in some type of finance role or do prop trading at a commodities firm like Glencore or Vitol.
  • Apply to business school and use the MBA to switch careers.

And if you get fired due to underperformance, it’s really difficult to win a trading job at a different firm.

That creates a lot of risk if you’re a new graduate who’s still considering different options and you’re not 100% set on trading.

Proprietary Trading Careers: Right for You?

Summing up everything, here’s how you can think about prop trading careers:

Pros:

  • Pay and advancement are almost completely meritocratic – if you make money for your firm, you will be rewarded and advance quickly.
  • Recruiting is more accessible if you have good math/probability/coding skills and a technical degree – even if you’re not at a top school.
  • The work can be quite interesting, especially if your role is more quantitative.
  • The culture and lifestyle can be quite good since firms and teams are small, and there’s little bureaucracy or office politics.

Cons:

  • Exit opportunities are limited, so if you’re not 100% certain you want to be a trader, you should not join a prop trading firm right out of undergrad.
  • It’s easy to get scammed by less-than-legitimate “prop trading firms” that pay you no base salary and ask you to pay for training or data access.
  • If you do not perform well, it will be difficult to get another job in the industry, so you’ll most likely have to switch careers.
  • You don’t “build” anything tangible. At least in industries like investment banking and private equity, you can point to Deal X or Company Y and explain how your work affected it. In prop trading, good luck explaining anything you do to normal people.

In short, prop trading is like an extreme version of sales & trading, so the points in the sales & trading vs. investment banking article apply even more readily.

It makes sense if you have an undying passion for the markets, you’re math/CS/tech-oriented, and you know that you want to trade for a long time.

If not, it makes more sense to start your career at a large bank for the branding, network, and better exit opportunities.

And whatever you do, please do not join the legion of 10-year-old Fortnite players attempting to be “prop traders” on Robinhood.

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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  1. Just stumbled upon this website and already impressed with the content! I am from Melbourne, Australia. Before the strict Covid restrictions I went to Sydney for an interview with a Churn and Burn prop firm. Got to see one of the guys trade. Had the self awareness that is was not for me and came across as a bit unprofessional. Currently learning options and building a long/short portfolio. Guess that is more of a hedge fund type strategy. Surprisingly was able to get in contact with a hedge fund manager and I told him once I have a good long and short idea will email him again to show my thought process.

    Might be in contact if I need help. :)

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