Martin Kronicle

There is undoubtedly going to be a lot about Proprietary Trading firms in the news for a while and there’s a lot of questions about what and who they are and what they do exactly. It’s actually easy to understand: a trader is given a line of credit within his/her firm to trade for the purpose of generating trading profits. It is the firm’s own capital. The trader has one client: the firm – and in this case we’re talking about publicly traded firms that are under scrutiny. And they aren’t exclusively prop trading firms, they have what are called Prop trading desks.

I think a prop trading firm in the purest sense would be like the few I’ve mentioned in an earlier post, DE Shaw and Schonfeld. Another is Susquehanna Investment Group.

On the prop trading desk, the trader is typically given a monthly draw as salary, but that is not their main compensation, nor is it their motivation. I’d say all Proprietary traders are working for their bonus, which is a share in the profits they’ve generated for their firm. Those net profits go to the firm’s bottom line and are counted in EPS. If the trader fails to make money, they usually get fired. Most professional traders are excellent in playing superb defense – small or smaller losses are easier to overcome financially and emotionally speaking.

There have been some pretty stellar Prop trading desks over the years. Marc Rich’s first employer Philip Brothers (now Phibro) was a big trader in the day. So was their owner, Salomon Brothers. Another thing we can blame Sandy Weill for is killing Phibro and all the prop trading inside Solly. Trading profits can be volatile and neither Sandy nor Jamie wanted that type of risk on their balance sheet.

I’d have to look at the dates, but Commodities Corporation comes to mind as probably one of the first, if not THE first Proprietary trading outfit. I’ll have more on this in the next month. Goldman Sachs has always traded their own capital. They’ve also done merchant banking and investment banking and to my knowledge have never been too afraid to put their own capital on the line.

There has been some concern over the years about the concept of the Chinese Wall – the flow of information from the Agency desk to the prop desk and it’s not supposed to happen. Front running is putting your orders ahead of your clients. But what is it when you trade alongside that same client?

Here’s an example:

The Munderous Inter-net-of-my-fees Mutual Fund A (aka weapon of mass destruction) (Ticker:MFUXU) calls the floor of the NYSE and needs 1MM shares of MNO stock. You only trade 50M shares at a clip. Obviously, 1MM shares of buying pressure will put some wind in your sails if you’re long the 50M before the million share order gets filled. Doing so would be front running.

Buying the 50M shares (or another 1MM) alongside your client is called being a Specialist.

MartinKronicle has a Facebook fan page, if that’s what you call it.

The difference between commenting here on the blog and there on Facebook, it that you’ll be able to better interact with one another on my posts. I personally respond to each email and post as fast as possible, but I am entirely fortunate to have some very intelligent readers and fellow bloggers who interact with me and I want you to be involved.

I would encourage you to “become a fan,” as it’s called that for several reasons. There is a bit of a community that is formed around blogs and social media and you might meet some pretty smart people and make some friends too. My guess is some of you might have some friends in common. Wouldn’t that be cool…

Also, I believe in this enough, I’ll be posting some exclusive content on Facebook that won’t appear on the blog.

Kapoor

For all my Indian friends, you can catch Anil Kapoor in this season of 24. He plays President Omar Hassan, of the Islamic Republic of Kamistan (it’s near Delhi). Crossing over as they say, Kapoor is riding the trend of 24′s success to re-introduce himself to American audiences. You can watch 24 for free over Hulu.com – if you can get a steady internet connection – or at Fox itself.

Americans will remember Kapoor from Slumdog Millionaire: he played Prem Kumar, the host of Kaun Banega Crorepati (Who Wants To Be A Milliionaire).

Trivia:

Jack Bauer likes to borrow actors who’ve been in other “24 meets Bourne Identity”-style films. If you look close, you’ll recognize the actor Akbar Kurtha (below) who plays President Hassan’s (Kapoor) brother Farhad. Kurtha played Prince Meshal Al-Subaai in the film Syriana – the younger Prince who needed “the cats paw” and who took over the kingdom from his father, much to his older brother’s dismay.

Kurtha

Syriana was based on 2 books by Robert Baer. Did you catch Baer’s cameo in the film?

More interestingly, is that Kurtha’s brother in Syriana, Prince Nasir al-Subaai – the older brother who gets blown up in the Range Rover – also had a significant role in 24 too. His name is Alexander Siddig and he played Hamri Al-Assad in Season 7.

Siddig

Tucker Carlson’s new blog The Daily Caller, has picked up my interviews with Bill Dunn. Bill is the Founder of DUNN Capital Management in Stuart, FL.

As important to me, he is also the Chairman of Reason Foundation, the publisher of excellent publication, Reason Magazine, who’s motto is Free Minds and Free Markets.

Memorable Quote (there are lots, but this one is best, from Part II):

“It is very tempting to be driven by the immediacy, but you don’t have any research on the immediacy. You have loads of research on lots, and lots, and lots of the past.” – Bill Dunn