Robb Reinhold: Hello, everybody. Welcome to Proprietary Trading. My name is Robb Reinhold. I am joined by Mr. Darren Fischer who is the CEO of Maverick Trading. Darren has a ton of experience in this industry, so I definitely would love to hear from him. I really want to go through the history and evolution of prop trading. Let me just quickly start off that when I use the term prop trading, that’s just a short market term for proprietary trading. Don’t be confused by that. Prop trading is proprietary trading.
Robb Reinhold: Now, I’ve been a trader since the mid-90s, and it’s really interesting how the market has changed and how the industry around it has changed. We’re going to be going into a lot of those things that’s changed, but we’re really going to be talking specifically about how the world of prop trading has changed, and how it was back in the 80s and 90s, how it was in the 2000s, and really, what it’s evolved into because one of the first questions we always get from people that don’t know the industry is, what is proprietary trading?
Robb Reinhold: We wanted to do this session to really bring that out, talk about the history of it, how it came about, how it works, and really, what you should look for, if that’s something that looks like you want to be a part of if you want to be a prop trader, what are the things you should look for in a prop trading firm? All right, so let’s go ahead and jump into this here.
Robb Reinhold: Now, before we just jump into prop trading, banks, broker-dealers, all this stuff, I really need to get some terms out there. One of the very first things you need to think about or know about is how the market works. Now, I’ve got this titled Market Participants. In this market, there are millions and millions of participants. Each participant has a different role in the transaction.
Robb Reinhold: If you go back all the way to the history of the New York Stock Exchange, before there was even a building there on Wall Street and Broad Street, the word got out that if you wanted to trade stock certificates, you went there on lower Manhattan. They went there, and that’s where you would buy and sell stocks and other things from people, and that became a pretty popular place, and became so popular, they even put a wall on the street to keep the livestock out. Now, it’s funny because Wall Street got its name from that, and it was supposed to keep the animals out. Some people say it’s supposed to keep the animals in, in the trading floor, but that’s basically where they built the New York Stock Exchange. That was an exchange.
Robb Reinhold: Now, to be able to go into that exchange, you had to be a member, very, very exclusive. Memberships became very expensive. Pretty soon, the average person was priced out of being able to go to the New York Stock Exchange. Basically, what evolved from that were companies like Goldman Sachs, Merrill Lynch, Morgan Stanley. These were companies that had seats on the exchange that would go in and make transactions for you.
Robb Reinhold: Now, these are called broker-dealers. When you hear the term broker-dealer, this is simply a company that has access to the markets, to the exchange, and they will enact transactions for you. Again, if you are a customer of E-Trade, TD Ameritrade, Merrill Lynch, they are your broker-dealer. The broker-dealers are in there, in the markets making trades all the time.
Robb Reinhold: Now, technically speaking, the public, you, myself, hedge funds out there, they are not in the market making trades. They are sending orders to broker-dealers, and the broker-dealers are going to the markets to make trades. As you can see, these broker-dealers, they play a big role, and they have lots of regulations they need to follow. For their services, they are paid a commission. They’re going to charge you a commission to do business at the exchange.
Robb Reinhold: Now, the last group I want to talk about in market participants are the market makers. Right, now, market makers, their role is actually really, really important. I always get the question from people who don’t really know how the market works is, Robb, what if I go to sell a stock, and there’s no one there to buy it? Okay, well, that’s totally impossible the way that these markets work now.
Robb Reinhold: Market makers are companies that are in there, and they are making a market. What that means is they must always be buying and always be selling. They must always have a bid out there, and they must always have an ask out there. Their job is to facilitate liquidity, meaning that when everyone is selling, they need to be on the other side buying, and when everyone is buying, they need to be on other side selling. Market makers help create liquidity.
Robb Reinhold: Now, you ask yourself, who are the market makers? Well, again, these are companies as well. Now, companies like Morgan Stanley and Goldman Sachs, they are going to have market maker divisions. There will be divisions of these big banks where they are doing market making. There’s also going to be smaller companies, private companies that are just in the business of market making.
Robb Reinhold: The reason that market makers are there is that when all the orders are marking from the broker-dealers around the world, the market makers are there to create an orderly market where people will get executed on their transactions. Whenever there is a big supply and demand in mallets, it’s the market maker’s job to go in and balance out the other side.
Robb Reinhold: This is how the market works, so whenever you, me, a hedge fund, we are simply sending our instructions to broker-dealers, and the broker-dealers are the ones actually facilitating the trade and taking care of the transaction. Again, I just wanted to go through that really quickly, just to make sure everyone understands because these are a lot of the terms we’re going to be using in here today.
Robb Reinhold: All right, let’s talk about how the exchanges of today work. Now, as I mentioned earlier, the New York Stock Exchange had a very not so noble beginning, but today, the New York Stock Exchange and the NASDAQ, they’re considered the major stock exchanges. Now, of course, we have other exchanges where other products are traded. We have the CME, the Chicago Mercantile Exchange, where a lot of the commodities are traded and the interest rate products. We have the New York Mercantile Exchange where things like oil are traded. Well, we’re just going to talk about the major stock markets.
Robb Reinhold: Now, 10 years ago, I would have had to put the New York Stock Exchange, the American Stock Exchange, and the NASDAQ, but the American Stock Exchange got bought out by the NYSE, and they basically closed the building of the American Stock Exchange. Right now, we really just have the NYSE and the NASDAQ. Now, this is where people think this is the market. That is not true. The market is much, much bigger than this.
Robb Reinhold: There are things out there called ECN, electronic commerce networks. Now, ECNs were really the first thing that allowed me and you to trade online. Back in 1997, this is when I started trading. I was one of the first traders at Maverick Trading. The way that we would make trades is we would make trades through these ECNs. Now, these are just small little exchanges on their own, but they are inside of the umbrella of the New York Stock Exchange and the NASDAQ.
Robb Reinhold: However, you can now go and facilitate a trade on of these ECN. For example, in the past, you would send in an order to buy 100 chairs, and inside the New York Stock Exchange, they would match you up with someone wanting to sell 100 shares. If no one wanted to sell 100 shares, one of the specialists there, which is the market makers on the NYSE, they would sell you 100 shares out of their pocket.
Robb Reinhold: Now, before technology got where it is today, this was the only way to do business inside the exchange, but they set up these electronic commerce networks, ECNs, and it allowed the small trader for the first time to go in and make an order. Again, you can send your 100 share order to ARCA. If there’s somebody, anybody on the other side selling 100 shares, it would execute the transaction, and these transactions were under a second. They were fractions of seconds, whereas if you send an order to New York Stock Exchange, remember, they were still using phones back then, they’re still calling on the phone, walking down to the pit, making the trade. It might take you several minutes.
Robb Reinhold: Now, when Maverick first started out, this was the world of trading. I remember, in our first trading platforms, you had to say where you wanted your order to go. You would have to go out and look on what’s called a Level 2 screen. A Level 2 screen is where you see all the bids and asks, so I’m going to draw this out real quick here. Basically, the Level 2 would allow you to see everyone’s best bid and ask. Again, you’d see ARCA was on the bid wanting to buy 1,000 shares. That means if I wanted to sell 1,000 shares right now, I could sell it to ARCA, but again, you had to look and see where the shares were available on these exchanges.
Robb Reinhold: Now, real quickly, here, I’m just going to talk about SOES just for a second because SOES was really the first thing or the first book that was ever written about the small trader and how they could access the market. It’s a very old book called the SOES Bandit, and the SOES System was called Small Order Execution System. Now, your shares had to be under 1,000 shares. You could do 999 shares, but you could send it to the SOES platform, and they put you in the front of the line.
Robb Reinhold: If there was a lot of people or a lot of institutions wanting to get into a stock, and you put an order in on the SOES System, you went to the front of the line and got your execution very, very quickly. Back then, trading was really more about execution than it was about reading a chart than it was about supply and demand, and the Elliott Wave Theory, and stochastic. It was more about execution.
Robb Reinhold: Now, what happened is once these ECNs got popular and once Level 2 got popular, all the institutions started hiding their orders, and the Level 2 no longer was working, and then we got the next edition to the exchanges of today, the dark pools. I know many of you have heard of dark pool. Basically, dark pools work exactly like ECNs, exactly like ECNs except for one thing, they do not publish their bid and ask.
Robb Reinhold: When we look at a quote, if you go and you look at a quote on Microsoft, and Microsoft is going to be quoted, it’s going to say, “Okay, the bid in 110, and the ask is 110.02.” What that’s telling you is that someone is out there buying at 110. Someone is out there selling at 110.02. What that’s telling you is that someone is out there buying at 110. Someone is out there selling at 110.02. That’s what it’s telling you, the best bid and ask. You were seeing the best and the ask for one of these exchanges, or again, the New York, NASDAQ or one of these ECNs.
Robb Reinhold: However, there may be someone buying at 110.01 in one of these dark pools. The way these dark pools work is you don’t get to see them unless you pay them. That is the key. If you want to have extra liquidity, if you want to be able to move shares where no one can see them, you’ve got to pay out access to these dark pools. What happened is a lot of the trading went into these dark pools.
Robb Reinhold: Now, it doesn’t mean it’s totally dark. These do get reported to the NASDAQ, and they are included in end-of-day volume, but we just don’t get to see the best bid and the asks. We don’t get to see all the liquidity out there. Again, this is how trading used to work, is it was definitely, as you can see, more about execution than it was about reading charts and using technical analysis.
Robb Reinhold: All right, so again, I wanted to explain how markets work. I want to make sure everyone has a good understanding, at least basics of how the market works because now, we’re going to talk about what is a trader. The funny this is, is this is one of those terms where everyone can tell me kind of what it is, but when it comes down to being very specific, there are lots of different types of trader. What we’re going to talk about, we’re going to talk about people that actually facilitate trades, people that actually make trades in the market.
Robb Reinhold: First one, we have the market makers. We talked about them. Their job is to simply create liquidity. They’re not really trying to make any money other than buy on the bid and sell on the ask. That’s a market maker’s job, is their job is to … Again, on Microsoft, buy shares at 110, and sell them at 110.02, and do that all day long as much as they can, as close together as they can. Their job is to create liquidity, and that’s really what they’re there for.
Robb Reinhold: Again, there are people that have jobs as traders, and there are market makers. Now, again, a market maker is not trying to read the chart. They are not trying to make a couple bucks at Microsoft. That’s not their job. What all they’re doing is to buy off the bid and ask, try to make the spread and create liquidity.
Robb Reinhold: Next, we have an execution trader. Again, there are people on Wall Street, and there are people in New York and Chicago that are execution traders. Basically, they are order fillers. As I’ve said earlier, remember, when you want to facilitate a trader or when a hedge fund want to facilitate a trade, they’re actually going to send their order to their broker-dealer. Broker-dealers are going to have traders. These traders are going to fill orders. They’re going to get orders come onto their desk. They’re going to say, “Okay, we need to buy 10,000 shares of Intel,” and so their job is to go in and buy 10,000 shares of Intel.
Robb Reinhold: Now, look, they just don’t go and hit buy a market. They, of course, have to be smart about it. They’re going to buy the right prices and try to get the right fill, but again, they are not trying to make a profit. They are trying to get the order filled for their client at the best prices they can. It’s up to the client to determine when they should actually get out of it, but for that trader, that trader doesn’t care about where the stock is in four days. It doesn’t matter.
Robb Reinhold: Again, as you can see, here, we have two traders, market makers and execution traders, they aren’t even concerned about reading a chart. That’s not their job. Their job is to just facilitate and place orders. Next, we get into a proprietary trader. We’re going to really, of course, focus on this. A proprietary trader I someone who trades for a firm with the firms capital. Again, that is just the most basic definition of a prop trader. It gets a little bit more complicated than that. We’ll go into that, but basically, a prop trader is someone who trades for a firm with their capital.
Robb Reinhold: Then you might have a professional trader. Now, these professional traders are actually kind of a dying breed. When I was on the Chicago Board Options Exchange in 1998, I met a couple of these traders, and these were people that owned a seat on the exchange, and every day, they went to work, and they traded their own books. They traded their own capital. They trader their own book. Then every day, they went home.
Robb Reinhold: It was kind of sad because the gentlemen I was talking to there was telling me that sometimes, he doesn’t even come in because it’s easier for him to trade at home through their trading platform. He said that, really, it’s kind of a dying breed. At Maverick Trading, we do our Maverick Summits every three years in Chicago, and we’ve done them all the Chicago Board of Options Exchange. It’s kind of sad, every time we go there, it gets a little bit more vacant, less people there, a little bit less business, but this is a professional trader. They are trading for their own company with their own funds.
Robb Reinhold: Then, really, you have a retail that’s similar to a professional trader. They’re trading their own funds again, but they’re not doing it in a professional manner. They’re doing it more as a hobby. We meet a lot of people that are retail traders. Really, the differences between a retail trader, and a professional trader, and a proprietary trader is really effort and technology and capital. That’s really the difference between … This is what a trader can be.
Robb Reinhold: As you can see, a lot of people are traders that may not know how to read a chart. Market makers, execution traders, they don’t care, but the people that really know, again, are the prop traders and the professional traders. They’re the ones that are going to be most sophisticated when it comes to what are traders.
Robb Reinhold: All right, so let’s talk about the beginnings of prop trading. Okay, so prop trading, again, is where a trader trades, again, and again, I’m going to use their own strategy. A trader isn’t following orders. A trader isn’t reading out of a book. A trader is making the investments decisions, and they’re making decisions based on what their analysis is.
Robb Reinhold: Now, the way this came about is that one bank years ago looked around and said, “Wow, we’ve got all this money from depositors.” Again, imagine a bank took you in $30 million of depositors, and let’s say they loaned out 5 million. One day, someone looked and said, “Hey, there’s 25 million just sitting there. Why don’t we use it to make some extra money? We don’t enough loans to give out. Why don’t we take that 25 million and make investments on behalf of the firm.” That’s basically how props trading started. What happened is bank, they went in and hired people.
Darren Fischer: Yeah, Robb, I just want to hop in here really quick. Back in the Great Depression, they had the Glass–Steagall Act that came out that forbid this activity, but over the years between the Great Depression, and really, 2008, various aspects of the Glass–Steagall Act got eroded away and allowed the wirehouses to be in to be able to do this. When you go down into your last point here about the Volker rule, that really tightened it back up, but it was really the eroded Glass–Steagall that allowed them to do that.
Darren Fischer: One other thing, when we’re talking about an actual prop trading firm, we need to delineate between the two of them. There’s really two types of prop trading, one is institutional prop trading, and that is your large firm. Generally, it’s going to have an office, a large stable of traders, but they’re trading institutional great capital. That’s generally defined as at least $100 million under management.
Darren Fischer: That really came about in the 1980s as well when people were looking around and there was possibly no more upward mobility for them. If they had the institutional contacts, they may decide to go out and run a hedge fund, or if they want run other people’s money and just wanted to trade, then they would open up their own institution proprietary trading firm. I think, going forward, we’re going to focus mostly on what is now known as the retail prop firm.
Robb Reinhold: … Darren. If you can tell, Darren kind of knows his stuff. Yes, and Darren became one of our traders back in 2009, and I’m telling you what, he’s been just a wealth of knowledge and information, so thank you so much. As Darren said, basically, the transformation was the bank started this all. They put depositor’s money at risk. Then, all of a sudden, it became either out of favor or illegal, and so what happened was this private trading firms popped up, and they basically said, “Hey, we will hire these traders.” Goldman Sachs is really the name that comes to mind.
Robb Reinhold: They did this better than anyone else. They didn’t really start off as a bank or really as brokerage. They started out as a trading firm, and they grew into this giant financial institution from, basically, having really good traders. The problem is, is that it stopped working. The big banks got out of the business. The small companies came in, and they said, “Hey, we will provide the liquidity for these people that want to trade on a professional level.”
Robb Reinhold: Right, so let’s kind of talk about how that worked out. Again, in the early years of prop training, it was all done in an office, and so you’ve really had to be in New York or Chicago, and primarily, New York. These firms, they would open up these trading floors, like you can see right here, and they jammed people in side by side and said, “Hey, your job is to start trading.”
Robb Reinhold: Now, the way that it worked back then is all of these trading firms were broker-dealers. Remember, we talk about what a broker-dealer is. A broker-dealer is just simply a company that facilitates the trading between an individual or an institution and the market. Really, as you can see here in this business, in this setup, the prop trading firm was really just like E-Trade. Hey, why don’t you come in and trade here on this desk? We’ll let you rent out this desk. We’ll provide you a T1 internet line. We’ll give you software, and we’ll give you an internet connection, and that was it.
Robb Reinhold: Now, one of the things that was really popular back then was ECN rebates. Now, ECN rebates, the electronic commerce networks, remember, I told you, they came about in 1997, 1998. Of course, all of these ECNs were private companies, and they wanted to grow their business. The only way for an ECN to make more money is to have more trades done on their platform. One of the things they did is they incentivized traders. Hey, if you make 100,000 shares of orders on our platform, we’ll give you rebates. We’ll pay you for that liquidity.
Robb Reinhold: What happened is they started to pay this liquidity out, so of course, what happened is all the traders, they flooded into these ECNs, the volumes went up, and pretty much, the game back then in the early years of prop trading was you kind of try to break even if you could. Of course, you tried to make money, but as long as you broke even in your trading, you would make money from these ECN rebates.
Robb Reinhold: The proprietary trading firm, they were happy if you could just break even because you just generated a whole lot of commission because, remember, you’re trying to trade as much as you can to get ECN rebates. As you can see here, it wasn’t very good for the trader. It was good for the ECNs. It was good for the prop firm, but it really wasn’t good for the trader.
Robb Reinhold: That really only lasted a handful of years. Really, the structure of the prop game was most required to have skin in the game. Back in the old days, when you got hired on by a bank, you traded the bank’s money, and you really didn’t have any skin the game, but as the business changed, these prop firm said, “Hey, You know what? I’m going to give you X amount of dollars. I need you to have this much in there alongside of it.” Then they basically gave you leverage on that amount.
Robb Reinhold: The early platforms was all about leverage. Hey, you give us 2K, and we’ll let you trade 10 times that amount. Really, they talked about 10 times that amount, 20 times that amount. Now, of course, the firm could give you what leverage they wanted, and that depended on your trading experience and things like that, but again, you rented a desk with a computer, software, state-of-the-art internet connection. I know that there were prop traders in the early years that were paying over $1,000 a month for all these things.
Robb Reinhold: If you take a look at, I’ve got to clear $1,000 a month, I’ve got to make as many trades as I can to try to build in my ECN rebates, you could see that that was just not that good of a setup for the trader. Again, traders should only trade equities. Back then, the options part, it wasn’t as developed as it was. The currency market wasn’t developed as it was. Really, the only game in town was day trading equities. When you went into the shop, you didn’t even a chance or a choice to make any other trades other than heavily traded equities on major US exchanges.
Robb Reinhold: All right, as you can see here, again, the reason why this didn’t last very long is that it wasn’t set up to benefit the trader. It was set up to benefit the prop firm, but it really wasn’t set up to benefit the traders. As you can see, the trader was cut from trading if losses was great than the risk deposit. Even with that, again, you can see was very good for everyone but the trader.
Robb Reinhold: Next one comes the Great Recession. Really, a lot of these firms were already teetering. Basically, the Great Recession really took a toll, not only on prop firms but really all of Wall Street. I mean, we had major banks going out of business. We had the government on the edge of collapse. Well, so not the government, but the financial system on the financial system on the edge of collapse, the government has to come in and bail everyone at, and because of that, there were a lot of rules that were created that came out of that financial crash.
Robb Reinhold: Sadly, it’s what we do as human beings. One of the things, I remember is that when we had the pipeline that broke in the Gulf of Mexico, and it was just spilling out all of that oil into the Gulf. I mean, It was horrible. It was terrible. What we did in America, we said, “Okay, no more drilling in the whole Gulf of Mexico,” and I thought to myself, “Well, geez, we’ve been drilling in the Gulf of Mexico for 50 years, and this is the first time it’s happened, and we’re going to, all of a sudden, now just say, no more drilling?” I’m like, “Okay.”
Robb Reinhold: Look, that’s what we do as human beings, and so after the Great Recession, everyone freaked out. Every regulator came on and said, “Okay, we are going to tighten everything up,” and so a lot of things change, and that business model of the early prop company, it did not survive that. One of the biggest things that really killed the old prop trading firms were the deterioration of commissions and spreads.
Robb Reinhold: I remember my very first trade I ever made, this was probably back in 1995, and I traded on Schwab. Charles Schwab was the very first company to over online trading to the guy on the street. I paid $59 for my first trade. Guess what? If you were under $100 in commission, that was amazing. It was absolutely amazing. 59 bucks was my first online trade. When I started trading professionally at Maverick, I was $22 and 50 cents. That was the commission. Guess what? That’s way better than 59. Look, I’m no dummy. That’s way better.
Robb Reinhold: It’s funny how everything is relative because you’re probably gasping, like, “Oh, my gosh, that’s a rip-off.” That was a great rate back then. What happened is commission came down to almost nothing. If your business was determinant by having those commissions in and you didn’t have profitable traders, it didn’t survive. We had a lot of the firms that have been the early movers, like the Ascend Tradings, the Eco Tradings, they got out of the business. They just left.
Robb Reinhold: It came to be that trader profitability was the only way for prop trading firms to survive and be profitable. Now, at Maverick trading, we started as a broker-dealer. We actually transitioned away from broker-dealer. We sold our broker-dealer business off to Terra Nova Trading in Chicago. We made this change to, hey, let’s only take profit splits from our traders. Let’s not have any commission markups. We don’t want to make any money on commissions. We want to make money off our traders being profitable. We had actually already made the switch in 2007, but really, what happened is all the trading firms found out that, hey, we better help our traders make money because the old system just doesn’t work. You started seeing a lot more emphasis on training, support, risk management.
Darren Fischer: Yeah, I just want to jump in here again, Robb. I think there’s really kind of a lot of the traditional brokerage or prop firms by … You put them between a rock and a hard place because they had set up all their infrastructure to encourage more trading and encourage, really, the use of leverage. You could use as much leverage as possible.
Darren Fischer: When you take a look at it from a professional trading standpoint, you really should be trading less than what people were encouraged to do, so they had to shift their entire training program if they even had one. They had to shift their entire support and coaching staff if they even had ones that’s working and get away from encouraging people to trade to really teaching people and focusing on the risk management.
Darren Fischer: There was a lot of firms out there because I remember before I came to Maverick, and I was looking at a lot of firms, there are just a lot of firms that weren’t prepared to do that. They were still stuck in the idea of this is a commission generation game. I would probably say half the firms that I even took a look at are no longer around anymore because they didn’t put in the alignment of interest between the firm and the trader that you really need to survive in this business nowadays.
Robb Reinhold: … you, Darren. I’ve known you for a while now. I’m guessing you researched all of them very extensively. I remember when Darren came onboard, he sent us a very long list of due diligence stuff, like, “This is what I need to know. I need to know this, this, this, and this.” I’m like, “How do you even know my dog’s middle name?” He knew my dog’s middle name. I’m sure Darren looked into a lot of other firms. I’m glad that we passed the bill on that one.
Robb Reinhold: All right, so really, I really want to just bring about things have changed, and so the prop firms of today, they really are about the trader. That’s great to see because if you weren’t, you didn’t survive what happened in 2008 to 2012. You just didn’t survive, and so when you’re out looking for a prop firm, and again, let’s back up a little bit because maybe that’s a little assumptive.
Robb Reinhold: Listen, a prop firm is really for is really for people that want to take trading to the next level. It’s for someone that says, “hey, you know what? I just want to be the casual trader. I don’t want to be the person that works at a day job their whole life and they make a couple trades on the side and the watch Mad Money on TV a little bit, and then they kind of talk about how they do some trading with their friends.”
Robb Reinhold: You know what? That’s not what a prop trading is for. That’s what the retail brokers are for. That’s what E-Trade is for. That’s what Schwab is for. That’s what TD Ameritrade is for. Prop trading is where people say, “Hey, You know what? I want to make this a career. I want to make this a substantial part of my income during my life, and I’m ready to take it serious. I’m ready to put in time and effort, and I’m ready to invest in it.”
Robb Reinhold: If that’s what you’re looking for, and I understand that’s not everybody, and for everybody that says, “Hey, that’s really not me,” You know what? Just go open up a TD Ameritrade account and buy some Tesla, complain about it when it goes down, and just do your thing. That’s cool. That’s totally cool, but if you really want to get into this business, then really, you need to make sure that you’re looking for the right things in a prop firm.
Robb Reinhold: Number one, I’m going to point out suitability and qualification testing. One of the things that has really hurt traders is that in the prop firms of the past, anyone with a pulse and a risk deposit was allowed to trade. Here you go. Here you go. Here you go. Go ahead and do whatever you want yourself. We’re not responsible. Really, there should be some suitability and qualification testing, and it’s pretty crazy that we don’t have that.
Robb Reinhold: Again, you want at firm with good software and technology. In your trading platform, it’s going to be very important, trading software, charting software, all very important, and of course, cost is going to be a big deal too. You want to take a look at the cost of those things and make sure you’re getting the best for the cheapest. You want to make sure you have a good support and coaching staff. We’ll talk about out that here in a second why that’s such a big deal, but trading is a lonely hard game, and you’re going to need some people around you somewhere in your trading career.
Robb Reinhold: Again, regular meetings, this is something we do at Maverick. We’ll tell you a little bit more about that later, but again, this is just all by yourself. The trader that is just by themselves in their office at their house, clicking buttons all by yourself, no one’s watching over them. That’s really dangerous. What happens is you make a lot of mistakes. You trade out of boredom. You blow your risk control because there’s no one there to knock you over the head when you’re being stupid, so again, so important.
Robb Reinhold: Again, risk management, that is the name of the game here. Again, you want a firm has risk management, of course, a firm that provides you trading capital. I had people ask me all the time, “Robb, how much money do I need to start trading?” I always say, “200 bucks. I don’t know what the minimum is at the brokerage is now. Maybe $200, $500. That’s the minimum.” They go, “No, no, no, I mean, to make money. How much do I need to make money?” I go say, “Look, you need 100 grand if you’re going to be trading equities, minimum. You need 20 grand minimum if you’re trading Forex or futures. That’s just the minimum.” They always look at me like, “Oh, that sucks.”
Robb Reinhold: Yeah, it does take a while to get that. Again, this is what a great thing about a prop firm is, is they have the capital. They have the capital. They want you to use the capital. I just want to make sure that you know how to use it properly. Of course, the way the prop firm works is you become the trader for the firm. You trade the firm’s capital, and then you keep a percentage of your profits, and the firm keeps the other. Let’s really go down this list because I want to make sure when everyone goes out like Darren did, Darren the king of due diligence, I want to make sure that you know what it is you’re looking for.
Darren Fischer: Yeah, but you’re stuck with me now.
Robb Reinhold: That is true. I did not do my due diligence on him. Just kidding. Trust me. There’s no due diligence to do on Darren. He’s the CEO of Maverick Trading now, and I’m just the janitor so here we go. All right, one of the crazy things really about trading in general, I’m talking about everyone. TD Ameritrade, E-Trade, Schwab, everybody, they will let anybody open up an account, put their money in it, and be an idiot, and then they’ll say, “Oh, it’s not our job. That’s not our job. We’re just the middleman. It’s not our job to make sure that you know what you’re doing. We’ll let you ruin your life savings. It’s not our job.”
Robb Reinhold: It’s just crazy that everything in this world that we do, if you want to do surgery, if you want to be a doctor, there is so much you need to do to prove your proficiency. You’ve got to go to medical school. You’ve got to do residency. You’ve got to pass test. You have to prove that you are capable of doing surgery. If you want to be a lawyer, you can just decide to be a lawyer one day. You got to go to law school. You got to pass the bar. You’ve got to prove that you have what it takes.
Robb Reinhold: Again, I know those are pretty, okay, doctors, lawyers, to cut someone’s hair. Do you realize that to be able to cut someone’s hair, you can’t cut someone hair professionally unless you go to classes, do practice, and get qualified and certified to cut someone hair? In all other professions, we have all these, okay, this is what you need to do, but, you know what? TD Ameritrade will say, “Ugh, just put some money it and just go for it.” Again, it’s really dangerous to people.
Robb Reinhold: Again, the prop trading firms of past, they kind of did this, they let anyone in the door, and they said, “Just go for it.” Of course, most of them failed, and they said, “Oh, well, we made our commissions and we’re happy.” I like trading firms that have some upfront commitments, and basically, have it to where you have to prove proficiency. I know at Maverick Trading, we have three requirements for people to trade live for the firm with the firm’s capital. They’ve got to pass our online test. They have to develop a written trading plan and submit it to management, and they’ve got to trade two months in a demo account and show profitability.
Robb Reinhold: Again, if they’re already trading in a demo account or they’ve been trading in real life, we just need to see the last two months of sales. That’s it. Basically, we’re saying, “Okay, let’s make sure that you know at least what you’re doing. You’ve passed test,” and again, if you need help passing the test, we’ve got tons of training programs that show you everything, but again, let’s see you pass test. Let’s see you put together a written trading plan that says, “This is how I’m going to trade. This is what I’m going to do when X happens. This is what I’m going to happens when Y happens, and this is what I’m going to do when Z happens,” to where you’ve already pre-planned out everything, and then you’ve shown us that you can actually follow that trading plan. Once you do that, guess what, you’re able to trading firm capital in Maverick.
Darren Fischer: Yeah, I just want to touch on the trading plan here really quickly, Robb. Before I came, I had a trading plan in my head. Of all the people that I’ve talked to over the years I’ve worked here, they’ve really liked this idea of a trading plan. What we found is that when things are going against you, people can be like a deer in the headlights. They don’t know what to do because they haven’t planned it out beforehand. Having a written trade plan, this is the business plan of how you are going to trade the firm’s capital, how you are going to make money, how you are going to support yourself as a trader.
Darren Fischer: You should always plan that exit, but you should also have some contingencies in place. I’ve spoken with people that had been trading, either Forex traders before, some of them were former market makers. Some people had been out on their own, and a couple that were execution traders for hedge funds, and they told me, “I never had a written trading plan before, and I was running large amounts of money. This is one of the best things that I’ve ever seen because when this position went against me, when the sector rotation occurred, I was able to just calm down. Look into my trading plan, say, ‘I’ve already thought this is what I’m going to do, and it was no longer a question of what am I going to do. It wasn’t even a question. It was, this is what I’m going to do.'”
Darren Fischer: We find that people are able to get out of bad positions much more quickly, realign their portfolios much more quickly and actually trade with a lot less stress. We really need to stress. When you’re looking at another prop firm, make sure that they require to have a written trading plan.
Robb Reinhold: It’s just crazy that we don’t do that. I mean, if you think about it, to be able to have someone drive a car, you have to take classes. You have to pass proficiency test. It’s such a dangerous thing to allow people to just put their money in and trade these markets because trading is tough. Trading is tough, and it takes some time and effort.
Robb Reinhold: All right, the next thing you want to make sure is make sure to look into their technology in the technology and their software. First of up, is their trading software, the execution software. Every platform is going to have a different trading software. Some are going to use things like Lightspeed. I know we started with RealTick. We’re now using Trader Workstation, or really, what you want is you want a platform that has good fast executions and that can handle what you are trading. The style of trading is going to determine what your trading software needs to have.
Robb Reinhold: Again, you’re going to need good charting. All trading nowadays is based on charts. There is no more trading off your gut. That never worked. Everything is done off of charts. You need a good charting software. You need a good accounting software, journaling software, and again, if you have any sort of … Again, communications software, what I mean is like, if you are having meetings, or chat room, or just things like that that software is up to speed as well.
Robb Reinhold: A big part of your career and your life in trading is going to be done on software. Those are your tools, so just like a builder, you want to make sure that you have the right tools for the job. In trading, you want to make sure you have the right tools. Let me stress again, trading software, and let me also make a little push for mobile training. I absolutely love mobile trading, so make sure that your firm has mobile trading avail because I remember, when I first started int his business back in 1997, I was basically changed to a desktop. All we have was the flip bones back then, and you couldn’t get internet into your house other than dial-up internet, so you couldn’t trade at your house.
Robb Reinhold: I had to be at the Maverick Trading Office to make a trade. I had to there, and so from 7:30 to 2:00, I’m in Mountain Standard time. I had to be there. I remember several times being out with my wife and saying, “Hey, I need to be back at the office before the market closes.” She didn’t want to leave. She’s like, “Oh, no, I don’t want to leave.” I’m like, “Whoa, whoa, wait a second. I do not want to hold these positions overnight. They’ve got too much risk. I need to go.
Robb Reinhold: I would end up having to drive to the office, close out my trades, and then come back and pick her up sometimes 20, 30 minutes out of the way. I love mobile trading, it has allowed you to all these amazing things. I mean, I have now trader all over the world. I remember I was trading in a cave hotel in, in central Turkey, in Cappadocia when Bear Stearns went out of basis. Whenever I’m making trades to go there, I’ve traded in Easter Island, at the middle nowhere, which is just crazy. I remember when Donald Trump became president, I was in Germany, and it was 2:00 AM there, but I was right there trading. It’s all able to be done on a laptop ora tablet or mobile. Again, I highly recommend, just make sure that you have mobile. It makes your life so much better. I’m so happy about mobile if you can’t tell. I think you can tell that it’s changed a lot.
Robb Reinhold: All right, trader support, all right, so trader support, again, this is where want to have a team with you. As I said earlier, trading is very lonely game, having regular meetings to go to really help, and one of the things we’d love to do at Maverick is we love to meet. We love to meet with our traders, and so we do group meetings and so we do group meetings, and specifically, every single week, we always meet on a Sunday night, and we get ready for the week ahead. We have our trading room, which is our stock and options division at 9:00 Eastern time, and at 10:00 Eastern time, we’ve got our FX division. Basically, we talk about the trades we’re looking at making for the week and the outlook we have for the week.
Robb Reinhold: Then we have another session, we call it the midweek update on Wednesday where we basically say, “Okay, this is what’s happened in the past couple of days. This is how we’re changing our outlook. These are some of the trades we’re looking at now. Now, we do those every week, and then we’re always meeting in between those, sometimes with just education classes, sometimes with Q&A classes, sometimes with training sessions on software. Again, the really helps a trade be involved in trading instead of just being at home all by themselves with maybe a book or two, it allows them to really be part of something.
Robb Reinhold: Then when it comes down to it, all of our traders have access to individual support. If you need help on charting, guess what, we have a charting specialist. We’ll help you with charting. You’re having a hard time putting together a call ratio backspread, or you’re having a hard time even knowing that that is, we’ve got a specialist that we can set you up with and you can have a one-on-one session with them to go over.
Robb Reinhold: Psychology sessions, this is a big one, and this is one that I like to do with our traders. Trading psychology is so important. It takes about six months to learn what I call the Xs and Os of trading, but it takes a couple years after that to really get your psychology down. This is a big part of Maverick. We work a lot on, okay, this is how you’re likely going to feel when this happens. When you feel this way, you’re likely going to make this mistake.
Robb Reinhold: Now, if you know that, and then you start to feel that, all of a sudden, you now have the power to choose differently. We actually go through, this is the choice you want to make, or better yet, as Darren said, let you fall back to your trading plan, where you’ve already decided what you were going to do. Again, everything is there to, again, help our traders become the most profitable they can because, in the end, our traders are our biggest assets. If our traders don’t make money, we’re not going to money as a firm.
Robb Reinhold: Again, analysis of trading results, one of the things that’s always important, like a coach, coaches always checking in on you, making sure, okay, did you go a little bit further today? Did you do a little bit more? If you’re in athletics, hey, did you run a little faster today? Let’s look at your results. Let’s analyze this tape. Let’s look and see what you did wrong. It’s all in the support of improvement and getting better.
Robb Reinhold: Right, now, this one, I really just should’ve spent 30 minutes on this one alone. This is everything. Now, look, I have been trading for over 20 years now. I have no idea how many trades I’ve made, but I know it’s probably at least over 50,000. It’s at least 50,000 if not more. I’ve made money on a lot of trades. I’ve lost money on a lot of trades. I’ve broke even on a lot of trades. I’ve had trades that were spectacular winners, and I’ve had trades that were abysmal failures.
Robb Reinhold: That’s the name of the game. Risk management is where you win because I don’t care what systems you use. This is where whenever we have traders put in their application for Maverick, and they say, “Okay, well, I’ve got this strategy that’s 95% accurate.” Okay. What happens on the 5%? Oh, it’s a blow-up. It’s a real, real you know what. Well, that doesn’t work. I don’t care if you make money 19 out of 20 times, if you make one buck 19 times, but on the 20th time, you lose 500, it’s not a good strategy. It’s not a good strategy at all.
Robb Reinhold: Risk management is absolutely huge, so we focus a lot on this. It’s why we love options trading. Options trading allows you to put yourself in situations where your reward is guaranteed to be greater than your risk. It’s amazing what you can do with options. The biggest thing about risk management, and I’m a big believer in this, it’s called forced discipline. All right, forced discipline is basically when you don’t want to do it.
Robb Reinhold: Remember, when you were a kid and you didn’t want to do your homework, or you didn’t want to clean up your room, or maybe didn’t want to eat your peas, and your parents made you do it, you’re like, “Ugh, what do they do?” Then you realize as an adult, those things are pretty important. Actually, eating your peas is not important, so scratch that one, but finishing your job, finishing your homework, cleaning up your room. Your parents were doing that because that was what you needed, you needed to turn into a fully developed adult that knew how to clean up after themselves and to go to work.
Robb Reinhold: That’s what that was about. That’s what your parents were doing. It wasn’t about … They weren’t doing it because they just want to yell at you. They wanted to make sure that you knew how to get your work done. Just the same thing, as a starting trader, as a beginning or intermediate trader, you are going to not want to do risk management. What I mean by that is you’re going to have a position go against you, and you can say, “Well, I bet it’s going to come back. I’ll let it go.”
Robb Reinhold: This is where you need someone to step in and say, “Okay, what are you doing? Let’s talk about it.” You’ll be like, “Well, I don’t want to take this loss.” Then we’re like, “Okay, well, have about this. Why don’t you take half the loss, and then take the other half here? Okay, we’ll work with you. We’ll talk with you about, okay, well, how do you mitigate this risk?” Maybe we’ll say, “Hey, why don’t you just go ahead and buy this put option, and all of a sudden, your risk is gone and you don’t have to worry about it anymore?”
Robb Reinhold: To have someone there looking over your shoulder, especially in those times when you don’t want to do the right thing, and that’s the hardest part of trading, is that trading forces you into some bad situations, and the market’s very good at it. To have someone there on your team show you, hey, look, if you sell this call here, and then you buy this over here, you can turn this into a minimal loss if things go against you. That’s where you need the help.
Robb Reinhold: Again, you need a risk management department that’s watching your trades, watching your overall risk profile, your account balance and everything. You need some help here. Again, this is just the number one, so when you look into it, make sure that they have really great risk management.
Darren Fischer: I think one of the things to talk about here for a trader that is not trading with a plan or is new to trading as well, sometimes, when a bad thing happens to a position or a portfolio, the trader can’t see the forest for the trees, and you really need that second set of eyes that is just passionate about the position that can take a look at it and show you some options. Like Robb said, there may be some more options rather than just booking the loss, or having to sell, having to buy. We can do different things. We can change it up with options. We can do a different offsetting position over here. You can hedge out the whole portfolio.
Darren Fischer: It’s important even if you are first in that, sometimes, you don’t realize the options are in front of you, you get what we call target fixation. You’re focused on one thing that might not be palatable for you to do. You need someone else to come and say, “Well, you’ve got … Yeah, option A is one thing too, but you also has option B, C, and D. What’s going to work best for you to get through this and move on?” You always have to ask yourself. Robb is very good about saying this. He said it to me several times. If I’ve been in a position that is not working out, and I’ve been bullheaded about it, he’s asked me, “Is this the hill that you want to die on?” The answer is universally, no. Sometimes, you need someone else to ask you that question, and to bring you right back on track so you can live to fight another day, really.
Robb Reinhold: I always say that. I always say, “Look …” People usually say, “Well, I got into this position because I felt this and this.” Now, they’re like, “Is it going to be the position that kills my …” Wait, wait, are you really telling me this is the hill you want to die on? This is the stand you’re going to make. Now, it’s like, “No, you’re right. This was a bad trade. Let me just get out of it.” They get out of it. They move on, and they make the money back. I do like that saying. Is this the hill you want to die on?
Robb Reinhold: All right, so of course, a firm, a prop trading firm, the big benefit is they provide capital. When you’re looking into your prop firm, make sure they provide enough capital out there to make it worthwhile. I am definitely not going to name any names here, so you’re going to have to do your own due diligence, but there are some firms out there that are prop firms. Basically, they’re going to start you out with a very small amount, like $100, $200, $500. Now, look, and they’re saying, “Look, you should be able to make money on $200,” and they’re right. They’re right. You should. If you’re a good trader, you can take that $200 and turn it into $250.
Robb Reinhold: Now, look, that’s a 25% return. That’s a really, good return. The problem is, it’s $25 bucks. There are some firms out there that would basically give you small amount, but look, all the firms out there, if you prove to them that you are good at trading, they all want to give you more money. That’s important, is they all want to give you more money if you’re going to be a profitable trader for them. Some are going to start you out with really small amounts. I would definitely ask about the amounts you’re going to starting with, and make sure you make your decision on that.
Robb Reinhold: Trader should have a clear understanding of what it takes to trade with more capital. Again, what does it take to trade with more capital? At Maverick trading, we make it very … I was going to say very simple, but then I’m going to have five caveats, very simple meaning, two consecutive profitable months earns you a capital increase. Now, again, we have what’s called a high watermark. I don’t want to get into that, but again, it’s a two profitable trading months above high watermark. If you don’t know what high watermark is, look it up. You’ll probably get some pictures of some flooding. It was in Pittsburgh in the 70s, but anyway.
Robb Reinhold: All right, again, make sure you know what the profit splits are, and the profit split should be in the benefit of the trader. Really, the industry standard right now is somewhere between 70 and 80% goes to the trader. Some firms have lower, and some firms have a little higher, so just make sure that you understand what the proper splits are, and then traders should have bonuses for our performances. Again, it’s one of these things where you want to make sure that you are getting compensated for the work that you are putting.
Robb Reinhold: All right, so let’s kind of go ahead and kind of and wrap this up. The first thing you want to decide, and again, thank you very much for joining us, and hopefully, you’ve learned something about the market, about trading, about prop firms, but really, the biggest thing you need to ask yourself is, okay, am I more of an amateur trader? That’s fine. Look, I’m not here to say what you should do, but being a real professional trader, it’s not an easy career. It takes time and effort, and it takes training, and it takes everything it takes to be successful in anything else. It takes effort and time.
Robb Reinhold: If you’re not really going to do that, then you know what? Open up your E-Trade account, put some money in it. Play around. Again, I already know you’re only going to trade Amazon and Tesla. I mean, this is … Netflix, you got to trade Netflix too, but that’s fine. That’s fine, but if you really want to be a professional, you want to say, “Hey, I am going to make this a major source of income for me and my entire life,” then you really should be looking into your proprietary trading firm if you don’t have a boatload of capital yourself.
Robb Reinhold: Just make sure you’re looking into the right firm. Make sure it fits what you’re looking for, and make sure it fits your trading style. Again, most prop trading firms of today only do equities. Some do options. We specialize in options. We’re like the opposite of every firm. We specialize on options, and we do equities on the side when needed, whereas other firms, they’ll do equities primarily, and they’ll do some options on the side.
Robb Reinhold: If you are a futures trader, make sure that the firm you’re looking into allows you to trade futures. If you’re a Forex trader, make sure are with the firm that allows you to Forex. If you don’t know what kind of trader you’d like to be yet, well, then look into it. Call around and see which ones are going to have the best training programs for you because, in the end, even the most experienced traders, I have people that come into Maverick that have years and years of experience, and they watch one of our videos and they say, “Oh, my gosh, I never knew that.”
Robb Reinhold: Yeah. Guess what? I’m still learning. I am still constantly learning. I’ve been in the business for over 20 years now. I’m still reading books. I’m still trying to figure things out. I’m still learning new softwares. I’m still trying to learn how to program better. I’m trying all these things because that’s what it takes to be successful longterm in this business. Make sure they have good support staff, and again, assets to capital leverage.
Robb Reinhold: Then, of course, like everything, not just with prop firm, but everything, is make sure you have an understanding of all the cost because there are people that come to us, and they say, “Well, I just want to trade for totally for free with no risk on my end,” and we say, “Thank you very much. We love you, and we wish you the greatest of success, and good luck finding anyone who’s going to give you capital for free with nothing on the hook.” All the firms are going to have cost. Make sure you have a firm understanding of all the cost and commitment it’s going to take on your end, so ask questions. If the firm is reluctant to answer those question, again, I don’t want to tell you what to do, but I think that tells you want to do.
Robb Reinhold: All right, so let’s do one last pitch here. Maverick Trading, we have two separate divisions, options and equities. Our options and equities division is called Maverick Trading. Our Forex division is called Maverick FX, Forex and futures. We would love for you, for the fact that you came here and saw this, we would love to invite you to our trading room. We would love for you to come and see what we do on a weekly basis, what we talk about with our traders, and how our traders interact with us.
Robb Reinhold: If you are interested in that, you are going to be reached out to by one of our recruiters. They’re going to send you an email and basically say, “Hey, thanks for coming to this and watching it. Are you interested in a seven-day trial? Are you interested to join us in our FX room or trade rooms? Look, come see what we do. We’ve been doing this for a long time, I really like how we’ve put together everything together in this firm, so come in, take a seven-day trial.
Robb Reinhold: One of the things I always tell people is go take our trader personality test. That’s really interesting. It’s the first thing we have our traders do when they come in as new traders in Maverick is take your trader personality test. It’s based on the Myers-Briggs personality test, and then basically, we’ll figure out your personality style, we’ll tell you, “Hey, these are all the mistakes you’re likely to make with your trading personality. These are things you’re going to do well. These are things you’re going to not do well.”
Robb Reinhold: You actually start your trading plan, the first thing you say is, what is your personality style, and then you basically build your trading plan around your personality style. If you are an extrovert, you already know that overtrading is going to be one of your downfalls. You’re going to start writing trading plan right away of how you’re going to avoid overtrading. To me, it’s a very interesting thing that’s very proprietary to Maverick.
Robb Reinhold: Again, of course, we’re always looking for traders, so if you’re interested in becoming a trader for Maverick, just go onto our websites, click the Apply button. It will take you through a series of videos and information, and then basically put in the information, and the recruiter will reach out to you and start the interview process. That’s all I have for you. Darren, do you have anything for anyone?
Darren Fischer: No, Robb, I think you covered it pretty well. Again, thanks everyone for coming. As Robb said, the recruiter is going to reach out to you, see if you’re interested, and they’ll be answer any other questions you have, and we look forward to seeing you in our trading room this weekend. Thanks.
Robb Reinhold: One last thing, Darren wrote a very, very substantial paper. If you want to just fact check me to see if Darren knows how to do due diligence, Darren wrote a research paper. I’m going to call it a research paper. He wrote a research paper on the history of prop trading. It’s on our website, go to Continuing Education, and go to History of Prop Firms. How many words is that thing, Darren?
Darren Fischer: About 6,000, I think.
Robb Reinhold: That’s it? Just 6,000? I thought it was 60,000.
Darren Fischer: No. No.
Robb Reinhold: It needs more pictures, Darren. It needs some pictures and some animations. All right, so go check that out. Hey, thank you so much for joining me. I love to talk trading. I hope that you can tell it. I will talk trading even if there’s no one left to listen to me, I’ll probably still be talking about it. Thank you so much for joining me. Everyone, take care. Goodbye.