How I Would Have Started My Prop Trading Firm Differently

Job interview

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Firstly, I just wanted to thank you from the outset for your ongoing work and contribution to the trading community. I have read your book, I read your posts daily and I admire greatly the philosophy of your firm SMB Capital. Your firm really is the pioneer of trading education and skill development for prop traders.  I hope you realise the level of interest you are generating as you should be proud.I am contacting as I hope to one day emulate some of your efforts here in Australia. I began my career trading equities for Morgan Stanley in London. It was an unbelievable experience but I was unfortunate to lose my job in the height of the financial crisis. From there, I joined a Prop trading firm in Sydney but have recently left in part because I wasn’t performing and because the way the firm was run was woeful. There was no training, no team communication, no encouragement, and no skill development of any sort.

Of course this should first and foremost be down to the individual trader but I can’t help but feel this firm is setting itself up for complete disaster with these inefficiencies. There is such a HUGE opportunity here in Australia for prop trading to take advantage of the tectonic shift that is talking place in the world economy with the emergence of China and India. Asia will be abound with trading opportunities. Yet there is only 1 prop firm in Australia doing it well. I have begun a mere process of education via an Asian trading website I have setup and I hope this to be the springboard for many other initiatives. I actually mentioned your firm in my latest post:

You get a lot of specific trading questions. My question is in regards to actually starting and running a prop trading business. Do you have any plans to expand overseas, especially here in Asia? What were the major hurdles you faced when you began your business? If you could start again, is there anything you wish you had known or prepared for better?  And is there a certain level of capitalisation that you think is required at a minimum to successfully run this kind of business to begin with? I have many more questions but I appreciate you are a busy man.

My plan first and foremost is to get my trading to an elite level. I will have to do this solo for now. I hope that my blog posts and education will help my trading as well as build a powerful network of traders around me from which something can happen in the future. Any tips or pointers in my journey would be of genuine value.

Once again, thanks for you work and I appreciate your time.

Bella Responds

You have asked a lot of questions I would be happy to answer the ones I will not answer in this post via a skype call if you are interested.  I would like to tackle the issue of what I would do differently.  I could fill a book answering this question (hmmmm One Good Firm?) but will just offer my most important observations.  I find this a quite interesting exercise.

1) I would have sued the firm that first poached some of our traders.  I made the mistake of trying to reason with this firm but they see the world very differently than me.  Sometimes in business you really do just have to sue people to get them to stop their damaging behaviour.

2) I would never compete in the extremely low margin space.  Being in the business of offering a trader a better deal who makes minimal gross a month is a waste of time.  Big traders, with real capital behind them, taking real risk on them is the best space in prop trading.  One GMan is worth 30 small pikers.

3) I would have partnered with deeper pockets earlier.   We recently have done this and now can offer more significant amounts of buying power to excellent traders.  There is always someone with a lot more money than you.   There will be years as a firm where you lose significant money.  I know most traders think all prop firms do is make money.  This is not accurate.  There are years where checks must be written for your personal bank account.

The cost to the firm is not just transactions costs.  There is rent, staff, the cost of capital, equipment, legal, accounting, compliance, web development, advertising, technology investments, and trading losses on weaker traders.  By partnering with deeper pockets this makes these years much more manageable.

4) We have done a very good job of sticking to our niche- training new and developing traders.  The Street is very competitive.  To be great at anything requires superstar focus and a daily grind.  At the start we spent a little too much time overly concerned we were weak in certain areas that were outside niche.  Embrace what you are best at and build your firm from your strengths.

5) We should have started with four partners.  There was too much work at the start for just Steve and me.

6) There are certain things I do not do well.  It took me a long time to recognise what I do not do well and remove myself from those situations.  I am terrible managing people.  I couldn’t be less interested in selling something.  We now have new partners for that.   But I am really good at teaching, writing, negotiating, developing new training techniques, and creating a vision for the firm.  At the start I spent too much time trying to do the things I am just terrible at instead of  finding partners with better skills to cover my weaknesses.

7) I could have handled loss better.  I spend many sleepless nights when we lose/lost traders.  In trading people don’t make it, people can cut earlier than you would like, they can leave firms for another and they might find new careers better suited to their talents.  It is very difficult on me when we lose a trader.

I have often said that trading is the hardest thing most will do in the life.  Respectfully, being a partner of a trading firm is much harder.

What would you like your prop firm or broker dealer to do differently?

Mike Bellafiore

Author, One Good Trade