Pay to Play

Some trading jobs, especially those jobs with prop trading firms, involve a trader paying a fee in order to audition prior to being given the “job.” This entire scenario merits a fair amount of attention.

Prop Trading Firms

Proprietary trading firms, also known and “prop trading firms” or simply “prop firms” are based on the concept of hiring traders to trade solely to generate trading revenue for the firm. There are no 3rd party investors (beyond the owners themselves) who contribute their capital for the firm to trade.

Prop trading firms “hire” numerous traders to conduct trading on the prop trading firm’s sub accounts, with the intent that each trader will generate a profit, of which some of the profit will be paid to the trader as a “payout” for the trader’s work. When a trader has proven himself or herself, the prop trading firm increases the trader’s account size so that the trader can generate higher profits and earn higher payouts.

Some prop trading firms have their own system which they teach to traders and which they expect their traders to follow. Other prop firms allow traders to use the trader’s own methods and systems.

Under the Surface: Pay To Play

On the surface, prop trading firms might seem like an ideal scenario, but underneath the surface, they are not. Some prop trading firms add some additional requirements that assure that the firm will not lose money on any trader at any time. These additional requirements can include the following:

Training Fee: Some prop firms charge traders a fee to train the trader on the prop firm’s strategy or strategies. In some cases, this is reasonable, because the prop firm is delivering a service (training) to the trader, and the trader is receiving something of value which the trader can use for the rest of the trader’s life. However, it is still a fee, and you should be leery of any potential place of employment that charges a fee. Imagine if you applied for a job at Amazon, and the hiring manager at Amazon said, “You can only apply for a job with is after you pay us train you – and even then we cant guarantee that we will hire you.” Indeed, if a prop firm could charge a large and steady number of traders for training, they would never need to hire any traders. And they wouldn't need to because they would be in the business of offering training, not trading jobs.

Audition Fee: An audition Fee is a flat fee charged by a prop firm for each trader who wants to try the prop firm’s “challenge.” The challenge typically involves trading a demo account for the prop firm for any period of time ranging form several weeks to several months. Traders who “pass” are then offered a trading job with the prop firm. Traders who fail are sent packing. Either way, the prop firm has made money, and it hasn't cost the prop firm anything to make this money because demo trading accounts are typically free.

Trader’s own Capital: Some prop firms cause traders to trade using the trader’s own capital, with promises that if the trader does well enough, the prop firm will provide much more capital. Sometimes this is during an initial period, but sometimes it can persist at least partially. This is perhaps the most abusive strategy that some prop firms use to bilk traders, because any trader could use his/her own money to open their own account, from which the trader would keep 100% of profits, not just a portion.

Most prop firms employ one or more of these strategies to ensure that they make a profit on all traders, even the losing ones.

If you do accept a job with a prop firm, you should not only expect some of the above, but you should also be prepared to have tight drawdown limits on your account, and you should be prepared to have your sub-account closed or removed without notice.

Take-Aways and Tips

• All traders need to carefully evaluate prop trading jobs before accepting them, or even applying, because
• some prop trading firms charge traders a fee to trade on a demo account without a guarantee of employment;
• some prop firms require the trader to put up his or her own capital;
• some prop firms charge a fee for training.