Tuesday, July 06, 2010

Schonfeld Letter to Traders: It is getting tougher

Here is a letter from Steven Schonfeld the owner of Schonfeld Group Holdings LLC a trading group that until now how employed hundreds of prop traders.

Here's a brief overview of the firm and its founder via WSJ

'On December 5, 1988 we started Schonfeld Securities. Very soon after, we started hiring prop traders, and many years later formed "Opus Trading Fund".

Prop trading has always been and will always be an extremely important part of our business and certainly the one that is closest to our hearts. The best Schonfeld traders will always have a place to trade and the capital to maximize their earnings potential. We are committed to them and will always strive to provide an environment for them to succeed. Sadly, however, we are re-thinking the notion that less skilled and less successful traders can be here forever without producing sufficiently for themselves and the firm.

For over 21 years we have always done everything we could, with the traders¹ best interests in mind, to provide careers and opportunities for our traders.

We have always cared more than you could imagine for your careers, happiness, well being and future.

We truly admired many of your passions for trading and for the markets. Over the years we have stood by you and you have stood by us as well. There has been real loyalty on both ends and don't ever think we took your loyalty for granted for one second.

Bull and bear markets come and go. Good trading markets come and go. But unfortunately, our vision of the future of trading has changed. It is getting much tougher for traders to make a living or get by. The direct competition from black boxes, stat arb and high frequency trading which continues to grow at exponential rates is here to stay and has caused us to change our outlook for lesser skilled traders.

Based on the above competitive changes to the trading arena, we feel we are doing an injustice to both our lesser skilled traders and the firm by keeping them around. At best, they will barely get by and that's not why we are in his business or what they should be here for.

Unfortunately the career of trading is not a good option for lesser skilled traders going forward. We will be letting go many of these traders over the next 6-12 months. It is with deep regret and the hardest thing we have had to do since the inception of the firm in 1988. It truly saddens us to do this, but we are doing the traders who will not be making a living going forward a favor, so they can venture into different careers.

It is even more painful since many of you have been so loyal and really good guys.

To those of you that we ultimately let go, we deeply apologize but whether you understand it immediately or not, it truly is best for you.

After discussions with the managers and exhaustive quantitative research our objective will be to reduce the number of traders we have down to those that we believe will make a great or very good living trading for years and years to come with the necessary skills needed.

The traders who are newer to trading will be given some extra time to potentially have their skills stand out. The days of a trader making a living by generating $50k to $75k of adjusted gross annually are over. There is room for only highly motivated, skilled and developing traders that can add value to each other and the firm.

Once again, we wish it was different and are extremely sorry for those that don't make it.'

Notablecalls: Nothing to add really. We know it's happening. The business has gotten tougher yet again.


Unknown said...

We are hearing similar themes and trends from others, confirming what Mr. Schonfeld is saying in his letter to traders, who he plans to let go soon.

Computer hardware and software is continuing to take over jobs and displace people throughout our economy. It’s partially why there is a jobless-recovery. It’s sadly-ironic because people who were displaced from manufacturing and other jobs found a new working-home in trading. Unfortunately, technology is threatening their jobs in trading too.

It seems that every few decades, entire industries must adapt or face decline as technology races through convergence into wide-scale deployment. Think video rental in video stores, to DVDs, to online downloads, to iTunes, and now Blockbuster is history. Look at the technological-obsolescence in printing to iPad too. Service businesses are the next up for outsourcing and loss of jobs to computers too. It’s not just manufacturing.

In the 1970s, there were fixed-commissions and Wall Street was a sleepy place to work, with little risk taking and a very low and depressed Dow Jones average. Unlocking fixed rates generated lots of competition and innovation.

When regulators allowed the creation of electronic-exchanges, business moved away from floor-specialists. It created an opening for people to take on the role of mini-specialists-of-sorts on ECNs, and those retail and prop traders became the new market makers. Rock bottom commissions, technology and day trading firm structures (like Schonfeld) empowered this change.

But now technology has progressed further and high-speed computers with algorithms and auto-trading programs is displacing the small-business market marker. It’s like big-corporate farms with high-speed combines replacing the small family farm.

HFT (high-frequency-trading) is all the rage and causing it now too. Pundits blame HFT for the flash crash in early summer and retail traders are complaining that HFT are crowding them out of the markets. But just like ECNs replaced floor-specialists (people), computer-trading may be replacing some small-business ECNs too.

HFT may get a beating down from Congress, as part of Fin Reg and tax policy too. Can the HFT firestorm be held back?

I am not a trader, but am wondering if HFT create market opportunities for other types of traders. This needs to be explored and discussed.

Option trading is picking up steam in our view as tax preparers. Is this one of the reasons? Because option trading is less susceptible to HFT?

Brokers, prop trading firms and others are also now marketing auto-trading systems to traders. Some prop trading firms have talked about offering black box systems - with capital to trade - to traders and splitting the profits. Retail firms are running TV ads for auto-trading systems too. But can small traders compete against HFT companies even with these auto-trading resources? Some probably can and others may still have trouble.

What’s the future of trading as a business? It’s an important question for all of us to discuss.

Another issue. Are regulators pressuring prop trading firms – behind the scenes - on the “disguised retail customer” (beneficial-owner) issue too? Regulatory pressure may call for more equal profit-sharing between traders and their prop trading firms, plus not allow deposits. If that becomes the new normal, it begs the question - why do business with smaller prop traders who don’t make lots of money?

Robert A. Green

Unknown said...

problen with HFT is the location of servers right at the exchanges which gives them a 20 millisecond look at all quite order activity before anyone elae.
They pay the exchanges extra for this.

This is "front running" and should be illegal.

Unknown said...

It sounds to me like a lot of prop traders need more sophisticated trading software to give them more edge, to level out the playing field a bit.

That is why we developed Spread Intelligence (www.spreadintelligence.com) , to give traders the edge back.

Steve Woodard said...

Schonfeld is a lieing firm....They never employed anyone...every one trading through them earned anything and every thing they got as a subcontractor or a self employed individual...This is just political theatre because they don't have the balls to just say your gone...IF they had actually employed people they would have been history as a firm a long time ago.....

bl said...

I agree to the increase in speed brought on by HFT computers so why not join them: get a list of beta tech and commodity stocks and trade them: ffiv vmw cree sndk rimm bidu veco wlt bucy joyg clf cf btu. Or bad news stocks: bp ctrp dndn amed. Look at the 2 min charts for the above at the open.

TraderDave said...

the HFT firms pay to get order flow data. If a hand trader has 3k shares to fill and puts the order in, it goes thru a system that INSTANTLY analysis how they can penny pinch the position. That's why you cant get out at one price anymore and every position in or out has drag.

this ensures your great days are just good, and your bad days are just a little worse. This effect every single day wears on your bottem line.

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