Martin Kronicle

Schonfeld and Shaw. No, they are not a law firm. They are probably run better and more efficiently than most law firms.

I got a few emails from both students and managers of the type of prop firm where you need your own money. Needless to say, the latter were not so happy with my letter of the law language. I hold fast to my definition of a prop trading firm: they have all the money you’ll need…

Read through Schonfeld Group and D.E. Shaw & Co’s websites and see for yourself how the differ in their language from other firms that claim to be prop trading firms.

I haven’t been this shocked since Clay Aiken came out as a gay.

Coming from trading stocks/stock options primarily and trying to learn futures trading, one thing that has always concerned me about futures is the possibility of a market going limit-up or limit-down. Being locked limit-up or down against one’s position would prevent any stops from filling and results in a much greater loss than the risk management strategy (eg. entry to stop) allowed for. I can imagine it would be devastating in a small account.

Can you share your thoughts on the approach to lessen the impact of that scenario? How does one account for it in a trading system? Do we just chalk it up as the price of doing business?

Great question. Limit moves are not unique to US commodity futures. When I traded scrips (equities) in India, they too have what they call “upper circuit” and “lower circuit” which are effectively the same as limit moves in the US.

That said, limit moves occur when there is an extreme imbalance on one side of the market. The purpose of the stop in trading is to have as much information disseminate as possible, not necessarily to “limit” one’s daily losses or gains. The trading halt allows everyone to assess what’s happening.

I’ve been on both sides of limit moves. On the losing side, I was long LC and FC when the news of mad cow hit the tape. The commodities were locked limit down for 3 days I believe. Trading comes down to position sizing. Entries and Exits are not as important as position sizing. I stayed with the position through it all and I think I made some money. I have the temperament not to panic. Should have been a 911 operator…It all comes down to your breath.

One way to avoid unlimited losses is to trend trade using options or multiple option strategies. I’m not generally a seller of naked options. You can buy calls and buy puts and you’ll always know what your maximum loss is.

Some commodities, such as Cocoa, don’t have daily limit moves. I’ve been on both sides of some very wild swings in cocoa too. Each tick is $10 and a 100 point move is generally a big day. That’s about the equivalent of a $10 move in COMEX gold to put it in perspective. Gold or Cocoa, it’s how a commodity generally behaves that is compelling – what are it’s normal volatility and big standard deviation moves. Position size with these in mind.

I stress, it all comes down to position sizing…

I know many of you look for trading jobs as Prop Traders, b/c you send me emails asking about certain firms.

You are perplexed and you should be. A typical firm will advertise that they are “currently hiring” or “looking for the next Bud Fox.” YAWN. So you go ahead and apply only to find out that you need to bring your own capital.

Well, this is not prop trading and the firms in question are not Prop Trading firms either. They are broker/dealers who are looking to leverage their computer systems and real estate. Nothing wrong with it, but it’s a very, very loose interpretation of what a Prop Trading outfit does.

If you want to check one of these out, know beforehand that you’ll most likely have to share in the computer costs, the data costs, parking, desk rental, and you’ll likely have ticket charges. None of this is illegal nor unethical – it’s just a bit of a stretch on the definition of a Prop Trading firm.

You might be able to use their capital too. B/D’s as such have better than 4:1 day trading buying power, as well as higher than 2:1 overnight leverage. All that means is that you’ll be able to lose your money first AND FASTER.

The best example of a real Prop firm would be what Commodities Corporation was when it was founded by Helmut Weymar in the late 60s. They traded their own firm’s capital. They had investors, but they were shareholders.

Another example could be like what I do – I trade for an entity/fund that is well capitalized. I don’t know who the clients are – and I don’t really care to either. I have one boss. All I have to do is make money. There is no need to bring your own capital, but you can oftentimes invest alongside the firm’s clients by investing in the firm or the fund itself.

Personally, I would be exhausted to have to do what they propose to do, both physically and emotionally. While I appreciate day trading skills – I have them – it’s too little money for too much work. Ultimately, even the lowest costs will eat up too frequent trading.

I use the techniques for intraday risk management and sometimes to enter back into a market that’s in a strong trend.

MartinKronicle is now on the Finance page of Alltop. Thanks to my readers, students, and to Alltop.