Monday, July 16, 2018

One person's story: a prop trading nightmare

Certainly the internet is the greatest "one thing leads to another" porthole ever designed by the mind of man.

This past weekend we ran into an associate with whom we had lost contact.  That motivated an outreach to another colleague, which turned into an hour-long phone conversation which yielded five or 10 major informational nuggets.  One such:  when queried about selling calendars as a strategy, my counterpart mentioned yet another individual who presented on this theme on an SMB trading site (2013).  (Turns out the presentation was on short butterflies ---- quite the memory and close enough.)

While listening to this presentation, I was led to a book -- One Good Trade -- catchy title, by the founder of the firm that hosted the presentation, and found the following rather remarkable, and sobering, words on Amazon.

Caveat emptor.

Top customer reviews
3.0 out of 5 stars

My review also describes their shocking Annual Report

April 24, 2014

Format: Hardcover|Verified Purchase

The SMB Training website reveals that "SMB is a division of T3 Trading Group, LLC, a CBSX broker dealer." I worked full-time in a non-finance job, and I traded at home during my personal time. I traded stocks, equity options, and forex before I saw SMB Capital on the second season DVD of Wall Street Warriors. About 16 months later, I bought the book One Good Trade on Amazon. One Good Trade made me believe that proprietary traders had an exciting and lucrative career. The book mentions the high failure rate of traders numerous times, but the book gave me the impression that failure was almost always the trader's fault. I decided to work at T3 Trading Group in Miami, and the experience was different than the environment described in One Good Trade. The combination of my experience and the financial statements reveals how T3 Trading Group really works.

The T3 Trading Group Annual Report (Form X-17A-5) can be downloaded from Edgar on the SEC website. In 2012, 99.89 percent of T3 Trading's revenues came from the monthly fees and the trading fees its proprietary traders paid to the company ($15,106,432). Only 0.106 percent of T3 Trading's revenues came from its share of the trading profits ($16,082). T3 Trading charges its traders for every share they trade. Traders are discouraged from trading a low number of shares per trade even if their trades lose a lot of money and even if they are placing the same number of trades.

T3 Trading charged each of my co-workers about $1,000 a month in trading fees. The $1,000 a month does not include the losses from the trades. On some days traders were profitable, but on most days they were not. Many traders are also charged several monthly fees. Total monthly fees can be as low as $120 a month. After one month at T3 Trading, one unprofitable trader was allowed to double the number of shares he traded ($2,000 a month in trading fees). Some traders may have trading profits that will offset some of the trading fees (and monthly fees). My manager told us on several occasions that many traders deposit additional money when the fees and the trading losses deplete their initial $7,500 capital contribution.

Turnover at T3 Trading is high. The Linked In website profile of CEO Sean Hendelman reveals that T3 Trading has more than 400 proprietary trading jobs. My manager told us that it takes 6 months for traders to become profitable at T3 Trading. If the average trader quits T3 Trading in 6 months, then 800 people held those 400 trading jobs in 2012. In 2012, each of those 800 traders paid T3 Trading $18,883 in monthly fees and trading fees. Some traders may have trading profits that will offset some of the trading fees (and monthly fees).

What are the odds of being a successful trader at T3 Trading Group? In 2012, all of the traders at T3 Trading had $53,607 in trading profits. The traders' share was $37,525 (70%), and T3 Trading's share was $16,082 (30%). It is possible that 799 out of 800 traders received nothing, and one trader received $37,525. It is possible that 798 out of 800 traders received nothing, and two traders received $18,762.50 each (the equivalent of a $9.38 per hour full-time job). It is possible that the top one percent of the 800 traders received $4,690.62 each, and the remaining 792 traders received nothing. No wonder most traders resign in a short period of time.

The T3 Trading website reveals why revenues from the paid training products are not on the T3 Trading Group Annual Report: "T3 Live and T3 Trading Group, LLC are separate, but affiliated companies through common ownership." The T3 Live website advertises two courses that cost $1,997 each. The Virtual Trading Floor costs $200 a month. T3 Live has many paid products. I never purchased any T3 Live training products. My manager's free training classes were vague. My manager's free training materials were skimpy. About two months after I resigned from T3 Trading, T3 Live sent me an email that offered me a yearly subscription to the Virtual Trading Floor for $999.50. I was also offered a package of one course (I had three choices) and one year of private mentoring for $1,199.

There may be proprietary trading firms that offer its traders an exciting and lucrative career. My description of T3 Trading is meant to help people avoid a situation where the fees the traders pay to the company are more important than the profit the traders make. I worked at T3 Trading for only two months, and each of my co-workers traded five times as many shares as I did. One day, I plan on reading One Good Trade again, and I plan on watching SMB Capital on Wall Street Warriors again. Reading the book and watching the DVD will be more interesting to me now that I have experience as a proprietary trader.