Running a Trading Desk- Why it’s so Hard

the challenge

I received this note from a partner at a trading firm in Eastern Europe. I thought it would be interesting to share our exchange with the trading community as many might find it educational.

Dear Mr. Bellafiore,

Following my email from 25 Jan of 2014 (then i sent you a review of The Playbook) i am continuing my trading development in the field.

I am proud to inform you that I have been contacted by a group of investors and we started a proprietary trading firm based in my country – Republic of Moldova.

We trade only US Stocks and we are opened since August 2014.

A few weeks ago I found a bit of time to start reading your One Good Trade. I would like to express my very best feedback towards this book. This is not just a good read for developing traders, but also a good step by step coursebook for those who started or manage a group of traders or a prop firm.

I decided to share with you a few issues I have experienced as a managing partner of our new born proprietary trading firm. (Fb, Twtr, StockTwits).

1. It takes a lot of time to educate a trader – even if the guys are smart, hardworking and have a strategy and a playbook. Also it takes a lot of effort and personal approach to make a trader improve and work on his mistakes. Its like a football team, you invest time, money and effort in order to pick the best of the best who will constantly be profitable and independent.

2. Considering the conversion rate of 2-5 % – in order to build up a team of 20 people, we need to filter around 1000, but thats just the beginning, because it takes time to develop all the skills of Risk Management, Tape Reading, Technical Analysis, Fundamentals, Playbook, Best Trades and so on. Its a very long process and it takes lots of time from the founders.

3. Seek for a strategy that works – during our development process, we have tried quite a bunch of strategies, starting from In Play on Earnings, to Technicals of Large Cap and Tech stocks, then we traded highly gapped 10% + stocks, now we are getting to the point where we combine all that depending on the market speed, structure and trend.

4. Finding a Pro Trader that will lead the desk – As we started we hoped that we will find ~ 10 traders on sight and then build the core team around them. Easy said than done, I have seen/discussed with no successful trader in Eastern Europe – even though we have been recruiting them from Moscow, Kiev, Odessa etc. (Successful trader >$10k/month+). Here I must say i was a bit dissapointed that even though eastern europe knows about trading, and there are big companies that offer brokerage, education and traders support, few of them have been interested in a partnership in developing a desk, mostly because they make money on commission/education and dont trade profitably.

5. Another point of dispute with my partners was trading – as i am the managing director of the firm and at the same time the risk manager, I am not advised to trade, but in case that we are in the phase of startup and constant development I do trade from time to time but I understand that my trading could be a lot better if I can concentrate only on it. As i ‘ve read in your book, you also give up on trading for management operations and I would like to hear a tip on what is the best to do in my case.

I would be delighted to receive a few tips on Trading / Management and anything that you feel like its important to know when launching a prop trading firm.

If somehow you or one of your traders will pass through eastern europe, we would be happy to have you as a guest in our City and our Desk.

@MikeBellafiore

1. It is a very large sacrifice for a firm to develop a trader from zero to consistently profitable.  You do not get a good sense of whether a trader will be a HPT, High Performing Trader, for about a year.  The investment into the trader with infrastructure, education, technology, capital, coaching, mentoring will not be recognized for two years by the firm.

2. Your failure rate is too high.  You must build a training program and screening process that will build a higher success rate.  If you are fully backing these new traders as we do in NYC and Austin (Kershner Trading Group) then a 2 percent success rate will not be profitable.

Also having trained traders from zero to HPT for the past 7 years, and training more to HPT than anyone else in our space, I can tell you that a success rate that low would be demoralizing to the firm and teachers.  You must do better here!

3. Yes you must find strategies that have edge and teach/introduce them to your traders.  But then you want your traders to build from these strategies.  As an example, our better traders were taught to trade by us, introduced to strategies, but now trade variations of those setups or strategies that they developed.  As I always say, a managing partner wants to build a firm where they are the worst trader on the desk.  You want to teach traders and watch them become much better than you.  That is the sign of a good coach.

4. It is very hard to find a solid trader who can also coach and wants to coach.  Some can trade but communicate poorly.  There are those however who recognize their biggest strength is not trading but coaching.   They enjoy teaching more than they do improving their trading game.  I suppose I am one of them.

5. It is very distracting to run a firm and trade.  Very few have success doing both.  There are days where I cannot trade and MUST handle firm business.  This gets you out of your rhythm with markets.  Also you miss very opportunistic trades while handling firm businesses.  Further when you are watching the trading of others you will miss some of your best trades.

Having said that, for me I would find it very hard to teach and run the firm if I did not trade as much as I could.  I do trade distracted.  But sitting in front of screens helps me to understand the present challenges of a trader.  It helps me see where the opportunity is and coach others to focus on it.  It helps me understand what our firm needs for future growth.

Good luck with your venture.  There are very few who do it well.  But it will be the most challenging thing you probably ever do in your life.  And that may offer a whole lot of fun and personal growth.

Related Posts:

The Failure Rate of a Proprietary Trader

How I Would Have Started My Prop Firm Differently

Find the Best Teacher

Mike Bellafiore is the Co-Founder of SMB Capital and SMBU, which provides trading education in stocks, options, forex and futures. Bella is the author of One Good Trade and The PlayBook. He welcomes your trading questions at [email protected]

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