You can probably start your own prop shop, co-located and all, for $10,000 of fixed capital a year and $100,000 of trading capital. I know some people trying to do this, and even pushing into the high frequency space.
The main barrier to entry is the huge amount of infrastructure needed to built, often from scratch:
- Trading infrastructure, high speed low latency scalable framework for strategies to be laid on top of. Preferably risk management is built in here.
- Back-testing infrastructure and enough tick data. Just having a nice executable here is enough here, since machines are easily scalable especially with a service like ec2.
- Research infrastructure. Sometimes people call this “bars research”, but it involves uniformly segmented time series data (e.g. technical data) coupled with an expressive backtesting language.
Given that it is very easy to screw up any one of those three critical parts, forget the strategy itself, it is no surprise that people are hesitant.
The scalable solution is to share these costs. Imagine the VC firm of prop shops. Lots of firms already do this: provide the trading infrastructure and then share in the trading profits. However, most of the competitors in this space are on one of two extremes: too much like normal prop shops, or too much like a software company.
Too much like a “conglomerate” prop shop: traders are treated as employees. It is not enough to pay traders via profit sharing, because they still feel locked to a physical office and are certainly vender-locked. At the same time, most of these prop shop do a really bad job of providing the tools traders need.
Too much like a software firm: traders are users. Ok, so now traders have all the freedom they want, but none of the help they need. You can’t learn how to trade from a user manual, and no amount of object oriented goodness is going to fix that. In contrast, a few hundred thousand dollars is peanuts to a VC firm, especially when only a small portion of it needs to be put at risk.
The right way gives traders capital, infrastructure, as well as the basics to get started:
- A test suite and environment for converting trading ideas into back-test-able strategies, all within minutes. A microsoft office for thinking ‘strategy’.
- Physical offices where initial training can be done, and where future support will be operated out of.
- Profit sharing that can be scaled up/down with the strategy.
- Multiple tiers of infrastructure for different levels of technical proficiency.
Why there are not a lot of companies in this space beats me (there are a few). Give me a ring if you’re interested in this business.
Prak The Sane
