If you’re a graduate fresh from University, or a beginner trader that can’t afford to part with the copious amounts of capital required to begin trading the financial markets, you may be wanting to start your trading career in Proprietary Trading.
What makes Proprietary Trading such a sought-after job for beginners and professional traders alike is not only the lack of capital needed to begin, but additional benefits like receiving on the job professional training from experienced traders, not being responsible for trading losses, and receiving a share of any profits made.
In this blog we’ll look at what candidates need to know in order to land their Prop Trader status.
What is Proprietary Trading?
Proprietary trading is when traders buy and sell trading securities to make a profit. Trading securities refers to trading assets like commodities, equities or forex instruments that are traded on active global markets.
As Proprietary Trading usually requires substantial capital to trade effectively, Proprietary (or ‘Prop’ for short) Traders usually trade on behalf of proprietary trading firms and other financial institutions like hedge funds.
There are two types of proprietary trades:
- Directional: Betting that a trade security’s price will either go up or down
- Market-making: Where the trader acts as both the buyer and seller of securities and makes a profit on the difference between the price at which the security can be bought, and the price at which it can be sold, known as the bid-offer spread.
An example of a proprietary trade could be an investor wanting to sell 200,000 shares of stock at £10.00 per share, but being unable to find any buyers at that price. In this example, a Prop Trader could make a market-making trade. The Proprietary Trader would offer to buy the entire block of shares at £10.00 per share, and then aim to sell the entirety for slightly more than £10.00 per share in order soon after to profit from the trade.
How to Become a Prop Trader
There are no set guidelines that make up the ideal prop trading candidate. All you really need is passion, desire and the drive that shows you want to succeed in your trading career.
Away from personal attributes, the educational path to a successful Proprietary Trading career for students would look something like this:
- An Undergraduate or Master’s degree in a ‘Target Degree’. Commonly these are: Computer Science, Math, Physics or Statistics. Engineering degrees from universities regarded as ‘Top Universities’ can also be included, as can degrees from lower-tier universities with good rated technical programmes. Whilst good grades do help, not as much weight is placed on them in recruitment trading as it is in Investment Banking recruiting.
- A good track record. Internship experience is always a great indicator of passion. There traders can learn the mental mathematics, laws of probability and programming skills that Proprietary Trading firms will ask after in interviews. C, C++ and Python are recommended languages to begin studying.
- Network Experience. It never hurts to network in business and Proprietary Traders will always be willing to offer help and advice to those wanting to start out. The best way to do this is to search proprietary trading firms on LinkedIn, then email them to introduce yourself and ask about their careers. If a candidate has a degree in something other than the target degrees listed, networking becomes more essential.
Whilst most Prop Traders that land entry-level roles are fresh from degree programmes with little or no full time work experience, that shouldn’t dissuade candidates who do have work experience and are looking for a change.
If a candidate has one of the target degrees, or has undertaken internships in trading, asset management or any other subjects that relate to public markets they possess the same level of educational background required.
Whatever their work experience or degree, entry-level Prop Traders just need to be able to think on their feet, stay calm under pressure, be thick skinned and quick to own up to and fix their mistakes.
Those who struggle under pressure or become stressed easily under the weight of demands and deadlines are unfortunately unlikely to succeed as traders.
Proprietary Trading Jobs
There are three types of jobs available in Proprietary Trading Firms.
A Proprietary Trader: Traders buy and sell trading securities and manage risk to make profit. Traders use either a model, software or automated approach or their intuition and judgment, but commonly it’s a combination of both.
A Quant Researcher: Quantitative Researchers calculate and design the mathematical models needed for trading algorithms and trading strategies.
A Developer: Developers work closely with Quantitative Researchers to implement the researchers’ mathematical models. They also write, maintain and tweak the coding that traders use to succeed in their jobs.
The Proprietary Trading Firm Interview
Once you’ve either completed a degree or internship, or you’ve got enough of the personal attributes and working experience behind you, the next stage after your application has been accepted is the interview process.
Whilst different proprietary trading firms have different interview methods and questions, most interview processes will include the following sections.
Math is essential to trading, and the ability to calculate figures quickly is a core part of the job so mental math challenges are bound to appear at some point.
You should expect either direct mental math questions, using mental math as part of solving a bigger question or equation as well as sequence tests.
Other concepts worth prepping for in advance include:
- Calculating a sequence of consecutive numbers
- Estimating square roots of numbers
- Quickly calculating expected values, for example the EV of a dice.
- Calculating probabilities of rolling sums, for example rolling two dice
- Square numbers up to 20
Proprietary Trading Interview Questions
As well as mental math and math problems, there are a variety of questions that also appear in proprietary trading firm interviews.
Questions can range from probability questions, to market making questions, to standardised questions such as the interviewer enquiring after a mistake you have made in your life and what your process was to correct it.
Sometimes proprietary trading firms throw in brainteasers to gauge how well you think on your feet, so be ready to stay calm and answer thoughtfully and honestly.
Problem Solving Processes
Just like brainteasers, proprietary trading firm interviews will often set a problem solving challenge and these won’t always be mathematical.
One thing to keep in mind is that your problem solving process will be more valuable than your answer. Prop trading interviewers are more curious about how you approach and set about solving challenges as well as how well you can articulate your thought process.
One reason for this is because in Proprietary Trading there are events called Prop Shops. These are either physical or nowadays, virtual, locations where Proprietary Traders meet and combine their stakes with other traders using the Shop’s facilities. As these are team events, you will need to explain your trading ideas or movements in front of the many traders at these Shops, so articulation is a key requirement interviewers check.
To handle this, remember to talk everything out and try to prevent yourself from becoming sensitive or defensive if you’re confused or stuck. Instead, take a breath, ask questions and float ideas.
That’s our roundup of all the essentials needed to become a Proprietary Trader. Provided you have the education or experience and you possess all the personal qualities needed to succeed there’s no reason why you shouldn’t start your trading journey.
Proprietary Trading is a great place to begin as a trader. The benefits speak for themselves:
- Quick reward and advancement: If you make money for your firm or institution, you’ll quickly accrue financial rewards and advancements
- More accessible recruiting: All you need is good math, probability, coding skills and/or a technical degree
- Interesting work: No two days are the same, and quantitative researchers especially find the work rewarding and engrossing
- Good culture and lifestyle: Firms and teams are small which forges good friendships and units, so there’s no room for bureaucracy or office politics.
If you’re ready to begin your prop trading journey with Alphachain Academy, you can expect to be allocated live proprietary capital within eight weeks, be mentored by our experienced Prop Traders and taught from our CPD certified courses that are taught by traders with years of institutional trading experience. Alternatively, if you have some experience trading and are looking for funding from a prop trading firm to take your trading to the next level, try our trader challenge today.