 This video is going to be a discussion with my good friend, John, which has been a prop trader for a very long time. I met him when I was at a firm which I'm no longer associated with and he was nice enough to come on the channel and talk about prop trading. So sit back, relax and enjoy the show. You've been in that industry for how many years at this point? I started in 2006. So you're a vet. 18 years at this point or set. This is my 18th year. I will be in September of this year. How did you actually get started and how did this all come about? It was honestly just partially luck. I graduated from university in 2006. I was looking basically at the end of the big bull market. I was looking to get into eye banking, sales and trading, all those typical finance jobs that you hear about or hear people want to take and try and do. I just couldn't get an interview for the life of me. I didn't have a bad GPA or anything. I graduated with a 3-3, but my friends, they all had 3-5, 3-6, 4-0s. They were all nerdy kids from Johns Hopkins. And I kept looking around. I tried consulting and then I found I had started to invest. I had a small brokerage account from somebody from my parents and I had bought Under Armour and Netflix. They were both newer companies at those times and I just thought it was cool and I didn't have any clue to the scope of it. I didn't realize people were day trading or prop trading or however they were doing it. I just wanted to find a way into it and into finance. I kind of just stumbled onto this job opening at a pro firm and I had a good interview. The guys liked me because I was an athlete, went to a good university and I just kind of talked to my parents about it and it was just one of those high-risk to reward situations where I was young. They gave you a salary for one year, something just to basically make ends meet. And I said I'd give it like one or two years, just to see where it is and in the worst case scenario I'll do what my dad did and just take what everyone else seems to do is just go get your MBA, right? And then you can make it easier to transition. And then I just happened to start. I was a new guy in 2007 when everything was going crazy. So it was kind of, even though I was new, there was so much volatility. It was as long as you kind of controlled your risk, you could make money, right? Even if you didn't do a good job controlling your risk, as long as you didn't get out, there was enough inter-day whipsaw where you could break even or even make money. And since I made money those first two years, I was like, well, I'll just see how it goes. And then I just, you know, I've been doing it ever since. And then I was at that firm for 12 years and then I left to transition to a new firm and I've been here since 2018. Because you've been there for, you watched your first firm for 12 years. So at this point, I would assume you were a senior trader? I guess technically, yes. You know, when you look at my colleagues at LinkedIn, you know, it's a senior trader, managing trader, whatever it is. But in my view, there was no official terminology for that. That's normal. Yeah, it was no official terminology. Basically how it worked is, you know, you became a senior trader when you started training guys. And after a couple years, as long as you were profitable and you were there, you were working hard, you could take on some trainees and you could try to train them. And, you know, basically your incentive to train them was, you know, you get a small portion of their P&L. You know, so I did that. I trained multiple people. I still talked to a couple of them that I still trade. And, you know, and that's how you kind of build your way at that firm. You and my friends that are still there, they all have a group. They all have a group of, say, three to 10 guys under them that are doing well. And, you know, while they're, it just did, you know, that little add on of, you know, P&L at the end of the month or the year or whatever it might be. By the way, at any point during this video, don't forget to check out the links in description. I did link all the tools I personally use in the description. Let's get back to the video. How many guys do you think continue trading after, I guess, starting out or after a couple years? How many guys stayed or how many guys left? Let me think here for a quick second. When I started, so I started in 2006. And in my starting class, we had 25 kids. And within the first year, say, within the first year, say five of them left, four or five of them left. And even though it was crazy, some of them just realized it wasn't for them. I want to say one kid actually quit within a month. And he just realized it wasn't for him. Realized it just wasn't trading in this particular firm or in what he was getting himself into. He realized it wasn't for him. And, you know, for him, similar to me, where I had a, you know, quote unquote backup plan, he just went to, he applied and went to med school. And they just did that. I want to say that I bet you everyone's still trading or investing. But I bet you now there's, let's see, one, two, three. I know of my friends that I started with, now there's five or six of us that still trade. So I think that's a pretty high percentage, right? When they, you know, especially when people talk about 90% failure rates. But starting in a platform like that, it really gives you a good foundation. And so the people that have made it and that are still trading, they have a good foundation. They know how to take advantage of high expected value situations, right? And they've made good money in the really big times and in the really big periods of time to help kind of sustain yourself, right? You know, every year of trading is different, you know, and everyone's personality is different. You know, I know some traders that are, I know we're kind of going off topic here, but some traders that are just real big homerun hitters and they just know how to crush one or two years and then they can sit dormant or they lose money for a year and then they're just waiting for the next, they make so much money that they're just able to wait for the next really good time frame for their style of trading, you know, kind of like 2020, 2021, where I know people that made multiple eight figure years and then they're now they're just buying their time waiting for that next really big cycle of craziness basically. And maybe we're starting to see that with semiconductors. Do you think that's more common than what people think? How a PNL curve goes? Or how would you describe like an average trader PNL curve? Is it like most likely like really big homerun like you just mentioned? Or there's more like small hitters like scalpers, I guess, that are maybe more making profit days in and out? Yeah, so that's a tough question. It's going to be personality based. You know, I know a number of traders that are very good at their process. They're very good at and I don't want to call them scalpers. Some of them are scalpers and some of them are just very good process oriented day traders where they're able to pull out whatever their whatever it is a consistent a consistent profit every single day, whether it's $500 or $5,000 based on risk tolerance, right? And there's some traders who don't want to. They think that's a stressful day. They think it's stressful looking for opportunities each and every single day. I think the mis the misconception lies. Personally, I think the misconception really lies when when you see that graph infographic that a lot of people post, you know, there's 250 trading days in a year. If you make $400 a day, that's $100,000, right? And I think the misconception is that people assume that every single day is equal. Everyone assumes that you just go and you try to make $400 a day and you just you do it on repeat for 250 days of the year. And that's just not that's just not trading, right? Anyone who is listening to this problem is interested in the markets. And they know that there is an ebb and flow in the market, whether you're a day trader or swing trader, you know, yeah, things go from lower left to upper right. But it's never in a straight line, right? It's up, you know, up down, up down. And depending on your timeframe, those up downs are going to be on a one minute chart, you know, like this, or on a 15 minute chart like this, on a daily chart like this, right? And everyone's profit curve is going to be different. It's, it's going to come down to that person. But I know people that do it both ways. So I can't say that, you know, one way is better or one way is more common than the other. Because some people like, like I was just saying, or they would prefer to just sit there and wait for the trade where they really think they have high risk reward probability and making their $20,000 in one day, but they might not make a trade for another two weeks versus the person that's trying to make $2,000 a day risking $300 at the time and just finding their particular good setups on their particular good timeframes for that fit their personality. This is a lot of what I've seen in my experience in prop trading, which was about, which felt odd at first because when I came from retail to prop at, I thought you're supposed to be like trading like hardcore every day, every day just taking trades and trades because now you have almost unlimited buying power. In most case, like, you know, you have to be worried about margin buying power fees are going to be lower than, than your average broker, I would say. And, you know, it's just something so new that you think that now you get to do you get to trade or you have the permission to just, you know, take every trade that comes comes around. And this is how you should be making money. And also, I think comes from podcast that there's a misconception about it that, you know, you get on a desk and now you're supposed to just go off the rail and just scalp everything that moves and all that stuff. And then I had, I would say my first mentor or manager, which was the absolute opposite, you know, it's a guy that would just sit there, wait five days for his setup, hit it with decent size, make money and then just watch YouTube or poker review trades and all that stuff. And then I'm there exhausted every day just taking trades after trades after trades. And then, you know, when I show my trade, it just looks confused of like, what did I do on that day? Like, why did you trade 16 tickers when you think I haven't traded in four days? So I think that could be a good, a good starting point to ask, how was training at your first firm and how did it work to maybe pair you with like a manager? Yeah, it's funny that you brought that all up because I, that's exactly how I was trained. I was trained to, and again, it's, it's, it's kind of luck of the draw, right? My manager just taught me to scout, he was a scalper. He taught me to scout and he was so good at it, you know, like he could read the level two, like, like no other, and he had such a good feel for the stocks that he traded. And it was just, he was just on repeat, just repeat every single day, you know, make a thousand to $3,000 every single day, like it was nothing. Come in and be done by 1030 and just, and he would record his days for me and I would just, I'd watch him over and then I'd watch him with my group. And once I started training people on this, I just couldn't, I couldn't figure it out, right? It just, it just, that, you know, everyone thinks differently, everyone interprets information differently, right? Whereas some people that firm were trained by the guys, you know, like your mentor where they're looking for extremes, special situations, whether it's an order flow situation or breaking news. And even though we're all on the same floor, right, it goes to show how people were able to branch out and figure out what worked for them, right? And it really took me until leaving that firm and going off my own to really figure out what I wanted to do and how I wanted to do it and really hone in my process. So I feel as if my, the last three or four years, I've been a beginner trader again, as I've really had to redefine my rules and really had to redefine my strategies and what I want to do and how I want to do it. But, but, so, but I think a misconception, like, so the misconception definitely lies, like, so some prop traders trade a lot and some people don't, right? Like, people think that just because you're at a prop firm, you have, you don't have to trade, like the prop firm just gives you the best thing about the prop firm, I would say, is that it gives you forced risk management, right? And that's, that's the big thing. You get the leverage, which is amazing, you get so much more leverage than if you're a retail broker, right? Where you get, you're limited to four to one interday and two to one overnight. If you're at a different type of firm, like my old firm, you know, where you could be fully backed, your buying power increases based on how well you've done and how long you've been there. So it's just there, it's a little bit different than retail, but it doesn't necessarily, you know, the amount that you trade isn't going to be more or less necessarily. And I think you mentioned something pretty important. And it's maybe the type of deal that you can get at a prop firm. So I can go a bit about it, but there's going to be different type of firm that offers sometimes fully backed or capital contribution. So you want to take the lead on this and maybe explain a bit more? Yeah. So when I, the firm that I first started at, and there's a couple like this out there, they're all, it's, they're all firms that they want to train you when you start within their ranks and you get a certain amount of buying power, your losses are covered. And you basically learn their strategies, learn from a mentor, the who sits next to you and works with you every single day. And then you work together as a group and you just, you really build up your, your playbook, right? And there's no expectations, there's no expectation of how much money you need to make. But, you know, but as long as you're profitable, everyone's happy. And then every six months or a year, you would have a conversation basically in like where you've progressed and, you know, are you using your full buying power? Like, are you hitting your lockout? Like, do we need, and then, and then raising those limits as you grow as a trader. And that's like the fully backed version. And the other part of that is you usually have to like leave a small percentage of your, of your P and L with the firm. And, you know, it's like a deferred compensation, you know, just in case you take a big drawdown or big loss, you know, they don't want to take the full hit on that. But if you leave, like, when I left, I got my deferred compensation that I still have there. And then the other side of prop trading is where I'm at now, where you can contribute capital. And this type of firm, it's usually for traders who have experience, they don't want someone to just blow through their own capital. And the firm's risk management is that I, if, for whatever reason, something goes crazy, if, if my positions go crazy against me, whatever my equity level gets to zero, it's like a quick conversation and like auto liquidate, unless it's something like flash crash, they won't auto liquidate you because obviously they'll see that it's, it's crazy. But the assumption is, is that they'll get, you know, they have on their end the risk management and where it's like, all right, equities at zero, equities at zero, message them what's going on. Are you just being stupid, you know, blow them out, you know, you need to, you know, you're at zero, right? Because, because under zero, it's, then it's their capital risk, right? So if they're just, there's two, it's just two different, totally different business businesses. So the capital contribution, I guess it's, it's pretty good for people that do know how to trade because then they also get to keep a bigger percentage of their profit, which is normally very, very high. Like you're almost keeping everything versus when you're on a fully back deal, because the firm takes the risk, they're going to take a substantial amount of profit, which sometimes as people get better and more profitable or depending on where they're in their career, some deal might be way better to go on capital contribution versus fully backed, I would assume. Yes or no. Yes or no. Just because like so, like I said, I have friends, you know, so for example, the fully backed, the fully backed deal, you know, you, you kind of start closer to 50-50 and then you kind of work your way up. And they, and that model has changed over the last, you know, 20 years in my previous firm because people left, people left for these other types of firms. But I have friends that are still there and they'll never, they will probably never leave just because they never want that stress of treating their own money, right? They never want the stress of, of what if, right? I, in the back of my mind, like what if I go on a really bad negative streak and then I have to put up my own money again, right? Whereas if they take a big loss, they, if they want to, they can just stay there and work themselves out of it, right? And or, or they can kind of leave and maybe they can find another place that will, that will back them, you know, based on their, on their track record. What was the other half of that question? Who would be better on a fully backed or capital contribution? Oh, right. Yeah. I mean, I just don't think, I don't, you know, again, this comes down to like risk tolerance, right? It's all personality based. Everyone's going to be different. Everyone's going to be different. Some people might like treating their own money because they don't know how to increase their risk, right? They, so they might, it might be better for them to see that their account is growing every single day and month, whereas at a, you know, when I was fully backed, you're just, it's just like purely P and L shop and it's just, you're getting paid on your P and L, my buying power stayed the same all the time, my risk stayed the same all the time, whether it was up or down X, right? Whereas if you're trading your own account, you can see that up count balance grow and you can see that growth, you know, it's in front of your face a little bit more versus, you know, trading P and, you know, it's a P and L trading based shop or firm, you know, and so it's not, the one way is not better than the other, for sure. It just, it's still, it's still going to come down to what works for you, right? There's no, there's no right answer. Yeah. And we all, we had that discussion before, but you've seen maybe more on your side. I haven't heard that too much. I've always thought that if people had the chance to go prop at a legit firm, they would do it, but to start to trade like prop with like a legit firm in New York or in the States, you also need your license. And it just seemed that people don't want to get their license, their SIE or their 57. Yeah, that, yeah, you know, so again, like when I first started, not it again, but when I first started, I had to take a series seven and 56. And my firm was a broker dealer at the time and my current firm is a broker dealer. And then, you know, like you were, like you just mentioned, now you have to, now you have to take a SIE test and a 57. Two different tests. I actually have no idea what they are. But people stopped this, you have to study for them. And, and I was able to get an exemption, right? They're now, my firm now, my old firm now, and a couple other firms, they've, they've changed their structure so they're not broker dealers anymore. And they're just set up as a hedge fund structure. So the traders don't actually have to be licensed. When you're trading one pool of money that's without outside investors, the firm can set up, set themselves up that way. You know, and, and they're going to have different rules, different types of reporting rules. You know, I don't know all the back end stuff, but my friends that are still there, they, they've, because so much time has passed, like their licenses have lapsed. And when I came over to my new firm, I was going to have to take my test, but I got lucky and was able to get an exemption from the exchanges because I had them, and I was still doing the same thing. But my, because my firm had changed their structure, they granted the exemption for me. Yeah. So that type of deal, it's because, what I believe is it's one or segregated account. I think that's how you say it. It's like everybody trades a separate account versus if the whole for all the trader trade, just one account at the firm. So the only issue that they can have is if everyone is short or everyone is long, then into an SSR stock to exit the position, you have to locate some shares. It could be, it could get missed at certain times, but for the most part, it doesn't change much for the trader. It doesn't change as much. It's just easier for them to at least get started because these licenses are quite, when I had to do them, the SIE was, I felt like it was really hard. It was like a good month, a good month of studying full time, no trading, nothing, just like really full time. And the 57, this one was easier because it was about trading. So they're asking question about option and trading and all these little things. So it's very in your field versus the other one was about insurance on bank account and a bunch of other stuff that if you've been just trading for, I don't know, three years prior to that, or you haven't studied in your city finance, you just have like you're unaware. And also I'm in Canada, you know, what do I know about US banks? So little things like this. So and all right. So would you say that prop trading is different than retail trading or maybe the strategy that some firm have wouldn't really be or retail trader are not exposed to? I think that over the last, say, five to eight, five to say 10 years, there's been a real rise in change of retail trading, right? And I'm not even just talking about Reddit and the meme stocks. I think even in terms of a lot of people who have done well and they've left prop firms, for the most part, the strategies can can be the same. I think that I think that a lot of the technicalities are different. Like you learn a lot more of the technicalities as a prop trader, at least my old my old firm, like you learned all the nuances between where orders route to and how orders work. And you have access to, you know, different types of scanners and proprietary technology where everything was built for us. Like everything, all the scanners, all the charts, all the execution and order entry, it was all built for us. They had all different sorts of, you know, proprietary tech for us to use and to try to take advantage of everything, right? Versus a retail trader when they're starting out, you know, let's start with the basic retail trader who might just use thinkorswim, right? Or interactive brokers or eTrade. You know, the majority of those traders, they might not even, some of them might look at the level two and look into liquidity. You know, I know that there are a lot that I'm sure they do, right? Like, especially if you use DAS through Centerpoint or Cobra, but that's like the next evolution of retail trader to me, right? Whereas, you know, some day traders might just go into their thinkorswim. They might go look at, you know, today is January 30th at, you know, 245. And recently, Mark had news of 20 cent stock and they might have just gone to thinkorswim, just buy me 50,000 shares, right? They don't care about execution. They don't care about the level two, what it's looking like. They don't, you know, they might not even look at the technicals. I'm sure they have a chart up, right? But they might just, I might just buy it, right? The next evolution of retail trader is going to be someone who's using DAS on Cobra or Centerpoint, for example. And they're looking at the level two and they see they're probably only getting level one data, right? Which is the top of every single ECN and exchange on their, on their order entry window. So they don't even see the whole depth, the full depth of it. You can get into seeing the entire, the total book of Nasdaq, Arca, Begex, Bats, all of the ECNs. And then if you're lucky, you can get IEX. You can get UBS, Goldman Sachs, you know, other market makers that are prominent players. And you can see all of that data as well, right? And you can start looking to see where liquidity is on the tape. You can start watching the prints closer and you can, you can look to see what the venue of the prints are, you know, and understanding the letters of the, of the prints, you know, that, and that's, that's like a prop trader nugget, right? Or a piece of information that I learned, you know, all of the letters, what exchange it means, it helps you find buyers and sellers on those exchanges. And it might give you clues and might give you an edge to, to what's happening, right? And I think that's kind of like where, like that intricate knowledge is where some of, a lot of it changes. I have friends at my old firm that, my old firm and other firms that are really big into trading these stocks that are halting, like a lot of stocks, a lot of these small cap stocks halt a lot now, right? And if you have a direct access platform, like at a prop firm, or I'm pretty sure Das has as well, you're getting all the imbalanced information, right? So something, something halts limit up at say $10. And then you can see where the indication is going to be, how many shares are being paired versus thinkorswim, or if you're just trading it, you know, something like that, you kind of have, you're kind of like trading in the dark, right? And someone might, might not know that the trading halts are five minutes, right? Or if it's not five minutes, it's gonna be 10 minutes. And it's not 10 minutes, it's gonna be 15 minutes. So we, it's always a five minute band, right? And then the next part of that is the band increases by 3% every five minutes. So if the stock halts at 10, and it's, it needs to open within, I want to say, I want to say 3%, I could be wrong. But if it doesn't, if it's not indicating to open within 3%, that's how you know it's gonna be a 10 minute halt, right? And if something indicates so high, it's gonna keep going until the band increases and with wide enough to, to find that imbalance price. And then that's, that's where the stock's gonna open. And it's some of those little nuggets are the, are the differences that you learn at a, at a prop firm, just because other people are doing it, other people are looking at those things versus, versus a retail trader. But it doesn't mean the retail trader can't learn those things, right? Because if they're, that's a hybrid retail using Das or Sterling or Lightspeed, they can, they have access to that information as well and can do that. So it's more about knowing that this information means something and how, what you can do with it versus having access. Yeah. Yes. Yeah. And like, for me, that's not my style of trading. I don't like trading those things. I don't like trading that style. It doesn't fit my personality. But I've made it one of my goals to this year to understand those, to try to see if I can find the patterns that exist. I prefer to trade mid or large cap names. So I want to find the patterns that exist in those mid to large cap names that, that go limit up or limit down. What's the, the change in the price and the change in the imbalance size? Does it lead to a reversal? Does it lead to a continuation, you know, and try to find those patterns out? What do you mean? On these mid or large cap, would you consider it like when we add the banks name that we're halting or? Yes, exactly. Something like that. So something like that back, last March, when, you know, all those mid cap banks or, and, you know, Schwab, direct brokers, all those types of things that were, when they were halting limit up or down or for something that happened will recently like save, right? Save recently had some news with JetBlue that their deal was being blocked, right? It goes down limit down and, you know, and then it opened up say a dollar lower, right? Approximately. So things like that. So that's something that more that I'd be willing to trade because real company, real news and versus something like DJYL or another Chinese Ponzi stock where someone is controlling the flow and you can't control your risk, right? And, you know, I find it hard to control my risk when something's halting over all the time because you don't know where it's going to open up next. It's, it's a little bit out of your control, but at least if it's a real company, my view is that there's a little bit less of that tail risk versus shorting something or trying to long or bounce something that's could be a liquidation or a Ponzi, right? Yeah, I think that's the biggest thing with halt on the small caps versus on the mid because if it's halting on a mid cap or large cap is going to be, there's like, there's news to most likely directionality, I would assume. There's always a random bounce that can happen, but as a whole, there's more chance that like you said, like there's less fat tail risk on it. Like even if you take a bad beat on it, it won't be your whole account plus more. It should just be like a decent size loss, I would assume. This conversation was just the first of many, but don't forget to like and subscribe if you enjoyed the show and also leave a comment down below if you have any question that you would like us to answer. Peace.