Investment

Family offices sniff out prop shops for extra high returns

Deals which offer a gross return of 50% to 100% a year are rare.  They are tough to negotiate. But you can occasionally find them in the proprietary trading business. 

Alternative investment consultancy firm Ace Capital Investments is currently negotiating a potential equity purchase by a family office client of theirs in a prop shop which trades electricity.

Rogers says family offices are well-placed to provide equity finance because they are more hands-off than institutions and happy to invest relatively small sums

This kind of transaction arises when a prop shop wants to raise finance for trading collateral. It generally happens when traders start a new business or hire someone new who needs their own collateral but opportunities are few and far between.  When they need collateral, they generally raise it from a friend with whom they have enjoyed a relationship. 

Karl Rogers, Ace founder, says: “I personally know the head of trading, which is how I was able to source our potential prop shop deal. The prop shop didn’t advertise.” 

Rogers is also head of US power trading at Risq, a finance group which provides pricing feeds, predictive models and insurance to sports and gaming firms. 

Gaming often has a close relationship with proprietary trading. SIG is renowned for trading options and ETF markets but also expects its traders to flesh out their skill through playing poker.  

Rogers says family offices are well-placed to provide equity finance because they are more hands-off than institutions and happy to invest relatively small sums. 

An investment banker said: “I’ve never done a deal in the sector. But anyone who wants to participate needs to be happy with the skill on offer.” 

The majority of prop shops are relatively small when starting out, offering a platform to two or three traders wanting to receive equity returns rather than a profit share. They usually grow organically from that initial capital investment and trading profits. 

Prop shops seek to provide their infrastructure, usually technology-based, which suits prop traders and their strategies which binds the two sides closely together. Beyond this point, traders are left alone to get on with their own business. 

Unlike hedge funds, they do not take on third-party clients because that would be a distraction and generally not needed due to the capacity-constrained nature of the strategies prop shops run. High-frequency trading has been a mainstay for a large number of prop shops.

Bigger firms include Citadel Securities, SIG and Virtu Financial, co-founded by Vincent Viola and Douglas Cifu, joint-owners of the Florida Partners ice hockey team. Other participants include Geneva Trading, Myriad Trading, Positive Equity and Tower Trading. 

They typically seek intra-day trading opportunities, strategies with limited capacity, strategies with a low market impact, leveraged-trades due to their short-term nature and use a market-making desk to turn over significant volume in order to receive rebates on fees for their spec traders.  

 

 

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