What is Proprietary Trading? Is it possible for undergraduate students to develop a career in the Prop Trading Field?
Proprietary Trading refers to traders buy & sell securities using the firm’s own money to make a profit. So it's fundamentally different from Hedge Funds and S&T. As an undergraduate students, it’s not impossible for you to break into Prop Trading. Let’s take a look:
🔺How is it different from Hedge Funds?- HFs raise capital from outside investors (Limited Partners), PT firms do not
- Usually, HFs bet on security prices going up or down, PT firms exploit small pricing inefficiencies (market-making)
- PT partners take higher % of profits
- PT: Extremely high annual returns due to much smaller capital base
- PT: more independent, operate in smaller, niche market
While Prop Traders buy and sell securities using the firm’s own money to make a profit, S&T serves clients of the bank and executes trades on their behalf.
🔺Roles available at Prop trading
- Trader: buys, sells securities; manages risk based on model, software, judgment
- Quant Researcher: comes up with mathematical models for trading algorithms and strategies
- Developer: implements researchers’ models; writes and maintains the code to assist with traders’ work
- Back office and support functions
- Most credit-based industry in finance
- Hierarchy: “clerk”/assistant trader -> junior trader -> senior trader -> partner
- Compensation may seem not as high as IB, but faster progression and everything you earn is in cash
- Automated trading exists but is deployed to a certain degree. Humans are required to tweak algorithmic parameters, manage risk and hedges, and find new opportunities.
- Extent of using technology to trade varies between firms - as influenced by their strategies and markets
- Exit opportunities are not so great since the industry is very specialised.
- Degree in Math, Physics, Stats, Computer Science, Engineering - solid technical programme is most common
- Possible for fresh grads with little-to-no experience in FT Trading work, but with internships in Trading, Asset Management - relevant to the public markets
- Qualities: think quickly, work under pressure, networking skills
- Preparation: learn C/C++, Python; mental math, probability, programming would be tested in interviews, network with prop trading firms professionals
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