Most people don’t know what really goes on behind closed doors at a proprietary trading firm. So, we went to premier shop First New York Securities to get some answers about the business and what they look for in prospective hires …
Damien Hoffman: Gentlemen, what exactly does First New York do?
Joe Schenk: Contrary to popular belief, our business is proprietary trading not day trading. Though we may trade intra-day, we are not day traders.
Our core business is a long-short equity book which is both domestic and international. We trade commodities and macro vehicles such as global interest rates, global FOREX, and Treasuries. We trade fixed income both taxable and tax exempt. We also get diversification by having approximately 250 or so independent decision makers.
Damien: Tell me more about those decision makers. How do you determine who will thrive in your firm?
Donald Motschwiller: The type of talent we generally look for are people spinning out of a bulge bracket banking firm or hedge fund. The people that make the most amount of sense for us are discretionary traders. Our definition of a discretionary trader is somebody who sources his ideas, sizes his ideas, executes his ideas, manages the risk of his ideas, and most importantly has been paid for his ideas.
When we look for new traders, we look for people that bring to the table another view, another skill set, another style, another strategy. We have an enormous amount of diversification at our firm. We don’t deploy a firm-wide strategy. We don’t have group think.
We also look for people who have a repeatable strategy with good historical returns and scalability so we can add size. And, again, our business is a bottom line business, so the strategy has to be profitable.
So, we are not a healthcare fund or a tech fund. We do not run a balance sheet intensive fund or strategy.
Liquidity drives our business. We need to know, “Is the product exchange traded? Is the product liquid?” All the products must be marked so we can get an accurate profit-and-loss statement. We want the ability to get out of our inventory in a relatively short period of time without impacting the market place or impacting our own portfolio.
Damien: Do you like to see experience on a resume before letting a new trader put a piece of your book at risk?
Joe: The biggest form of risk management in the firm is the fact that we trade only our own capital. So, we don’t have public or private money — we just have our own money. However, our model is a no-money-up model. Unlike many other prop shops, traders don’t have their capital at risk.
While interviewing prospects, we like to ask, “Where did you trade and how did you trade?” We like to see people trading their own money. I’m not saying the guys at bulge bracket banking firms or hedge funds are coy and cavalier about somebody else’s money. But, perhaps we might trade our money and our family’s money a little bit differently than somebody else’s money.
Damien: That seems very psychological. Is there a psychological profile that one needs to have or can successful trading be taught?
Joe: There’s a lot of correlation between successful traders and athletes. A trader does better when they’ve been under pressure and could live with his or her performance. If I were to guess how many of our traders were better than average athletes, I would say it’s a pretty high percentage.
Donald Motschwiller: It’s part of the commercial DNA we look for. If there was a guy who was an athlete in college in a very competitive environment which positively and negatively reinforced his actions, and if he can take the negative reinforcement and return the next day looking to be better, that person has what it takes to do well as a trader. It takes a certain kind of candidate who is able to recognize that it’s a bottom-line business and thrive on a daily basis.
In our business there is nowhere to hide. So, if Damien is a trader here, everyday Damien knows what he made or what he lost. Everyday the firm knows what Damien made or what Damien lost. You can’t hide on the desk if the desk does well but you’re doing poorly. It’s not as if you’re working at a hedge fund or a banking firm where you’re reporting numbers on a monthly basis while intra-month you’re not doing well.
There’s also no netting risk. So, if Damien is trading and Donald is trading and Donald messes up, it doesn’t impact Damien’s ability to get paid. So in many instances, at other shops a stellar performer’s pay may be mitigated by another sector or somebody else having a more challenging time.
Joe: A successful trader must also have a passion for the market. Then we look at academics and experiences. We like people that have good strong mathematical skills. We rely heavily upon our interviewing process which in many instances are four to five separate individuals that challenge the new person on a wide variety of professional and personal experiences.
Donald: The biggest difference between people who have success in our field versus those who have less success is the ability to take risk.
The first time you trade, you react to a script. If the stock makes a certain move over the course of the day, if you’re reacting to what has already happened you’re going to capture a very small percentage of that move. As you get better, you start anticipating. When you start anticipating you start capturing a larger percentage of that move.
But the guys who truly trade the markets the best — the most talented guys in the firm — they trade the markets intuitively. They’ve seen it so many times and are so confident in the decision making process that they’re not reacting. They’re not anticipating. They’re just intuitively going about their business.
Damien: Does that lead to a Darwinian natural selection where you guys are constantly bringing in new talent and replacing talent that can’t necessarily cut it on that level of the game?
Donald: If the trader is as advertised, I believe we are the best place on planet Earth for that person. Over the past few years the talent pool has become much better. So we have been upgrading the talent.
The turnover we experience is more an issue of guys coming in and just not being as advertised. I don’t recall instances when people left the firm because they weren’t given enough money to run or they weren’t making a reasonable amount of money.
The trader here is paid in cash, not in deferred comp or toxic assets. Here, the trader gets a formulaic way of getting paid — so there’s no subjectivity of what he’s going to make.
Therefore, this is a very entrepreneurial shop. If you’re somebody who is accustomed to and ready to stand by your performance, this is a great place to be. If your part of a big conglomerate and your department is up a couple of million, but you’re down three and you still get paid, that’s a whole different thing philosophically. This is definitely a place for entrepreneurs who have a lot of confidence in their ability. It’s a pure meritocracy.
Damien: Back tracking a tad, how did you make the decision that traders would not use their own money?
Donald: Over the past five years, there have been dynamic changes in market place. We believe capital gives us staying power. And in order for the firm to really be profitable, it has to have an economic model that gives the trader as well as the firm an opportunity to profit.
So, we have a platform of seeding propriety traders. Our platform provides clearance, execution, technology, and capital. And you as a proprietary trader will come in here and bolt your business model onto our platform.
In money-up models there is far less control the firm can have on the trader because the trader is going to take the perspective, “It’s my money and I’m going to do what I want with my money. Since you don’t have the risk, who are you to jiggle me out of positions when the market is going against me.”
Also, generally, in the money-up model most of the traders and firms are thinly capitalized. And I would say our competitive advantage in the market place is the fact we are substantially capitalized.
Damien: Does that imply individual retail traders are at a disadvantage?
Donald: It’s more and more difficult to make money as a day trader. I still think there’s plenty of opportunity for event-driven, catalyst-driven, short-term swing type of traders. But the high-volume, low-margin day trader … that business is more and more challenging because that’s what the computers do. And the computers can think, move, react, and anticipate much quicker than an individual.
Plus access to information has become much more commoditized. Thus, it’s more difficult for the individual to get a leg up on the pros.
Damien: Well, Don and Joe, thanks for giving us a glimpse into the inner workings of a premier prop shop on Wall Street.
Don and Joe: Our pleasure.
Interested in more trading knowledge? Check out our Wall St. Cheat Sheet Top 3 Traders Under 30.