Scouting programs have grown in popularity in recent years and many are holding themselves out as full fledged prop firms. Let's dig into what they are, where they fit in this industry, and their advantages and disadvantages.
A trader scouting program is one that evaluates potential traders (for a fee) to qualify them for trading a firm's capital on behalf of the firm. These evaluations come in different shapes and sizes, but generally they aim to prove the trader can manage risk and be consistent in their approach to the markets.
Many of these companies call themselves "prop firms," and while not technically incorrect, it's important to not the distinction between various types of prop firms and scouting programs:
- Traditional prop firms
- These are companies that have fully aligned their interest with their traders. The firms will typically pay a base salary, and bonus traders out at their discretion (based on performance but not strictly tied to it.) They typically require you to work on a trade desk, on a trade floor, in major financial centers around the world.
- These firms typically only hire fresh grades from top schools, or established institutional traders. For this reason, these firms are often inaccessible to retail traders looking to get into the institutional side of the industry.
- When people on the institutional side of the industry talk about 'prop firms' they typically mean this class of company.
- Examples include Jump, First New York Securities, Wolverine Trading, and Optiver (to name a few.) These days, most traditional props also are heavily involved in electronic market making or exotic markets.
- The firm's main source of revenue comes from trading operations and trading profits.
- Depository prop firms / first loss / broker-dealers
- A depository prop firm is one where the trader's interests are far less aligned with the firm. The trader isn't backed by the firm and has to put up a risk deposit. The trader also doesn't get a base salary, and will likely be charged a fee for using a spot on a desk each month.
- Should the trader lose money, they lose their own money first. This transfers the risk from the firm to the trader, and in return the payout percentage the trader gets from these firms is much higher than elsewhere (70%-95%.)
- Examples include T3 Trading, Bright Trading, and WTS (to name a few.)
- The firm's main source of revenue comes from marking up transaction fees and charging for training courses. Despite all this, many traders will go with a depository firm for access to institutional grade access to the markets (DMA, professional software and platforms, etc..)