I am planning to set up a small Prop trading firm. But still not able to get the right solution to set up. NSE Alpha membership is not a solution at this time due to cost and other compliances. So without that how can I form a Prop trading company? Can you give some solution? Does zerodha have anything to do with this?
I try to setup this with Interactive brokers, because they have prop trading solution, but in India they have only pool account structure. A common pool with multiple users can log in to manage that fund. But that will not meet my requirements. The problem is that trader A long and Trader B is Short on a stock it will squareoff
Can you give some insight to setup this? I tried many sources to get some information but not able to get
There is no solution to what you are asking. If in a single account, counter views are taken by different traders, they will negate each other. The only way around this is to set up multiple accounts for different traders, but I guess that will also be an issue regarding capital allocation.
I had suggested this solution earlier, building an interface which keeps a tab of which trader is placing what to calculate their P&Ls separately. But at the account level, counter positions would be set off. In any case that wouldn’t make a difference in the overall P&L for the prop firm or the trader.
We will soon have tags on Kite, so you can tag an order to anything you want. All such tags can be used for P&L calculation on Console. Today you have to tag manually on Console; this will allow tagging while placing an order. This can solve the problem of figuring out the P&L of different traders using those tags.
@nithin But companies like FuturesFirst, Bearstreet etc running without Alpha membership. So how they will able to achieve this?
The solution you mention can achieve with in-house traders. right? if we have a person trading remote it will not works, right? But how multiple traders can login to same account ?
Usually, large prop firms have an omnibus structure. So as I mentioned, they will have built a front end for their traders and if different traders place opposing trades, the Omnibus doesn’t fire order to the underlying exchange. The front ends manage the P&L for all traders. For the prop firm, the net P&L remains the same in any case.
Multiple logins to a single trading account can be potentially set up, but none of the retail online brokers offers this service due to compliance issues.
The best way to do this is by setting up an AIF or Hedge fund in India. You can then potentially raise money from outsiders as well. But hedge fund has a high entry barrier. All other ways are kind of grey, apart from taking an alpha membership.
@nithin The omnibus structure also required some brokers, right? Can you give some more insight about this setup, please? Is it possible to set up this omnibus structure with Zerodha?
Can you please give a ready-to-go solution for this?
No plan to use outside capital. Start small, grow slow
Inspired by Zerodha bootstrap model
Omnibus in markets outside India works so that all trades are taken in the firm’s name; the firm then decides which trade to allocate to which customer. It isn’t possible in India’s normal retail broking setup. All trades can be taken only in the name of the customer whose account is being used.
I was telling you that if you can maintain the P&L at the individual trader level yourself, the account used can be the same.
Let me give an example, your firm XYZ hires traders A, B, C. You have one account with a broker and all your capital sits on this.
Hire one person as a dealer who takes orders from A, B, and C. While taking orders, the dealer notes who is firing the order and maintains the individual positions of A/B/C. The dealer rejects the order if a certain order exceeds the capital allocated to A/B/C.
This dealer can be a human or potentially a piece of software that can be built on top of our APIs.
Your concern was that if A is long Nifty and B is short nifty, XYZ will have 0 positions. But this should make no difference to you as a prop firm as even if both positions were held, your payoff would be the same.
This is the best way to get started on this. Since XYZ is you and your own funds, no regulations will kick in as well.
Hmm… You are comparing apples and oranges. In the business of money management, you have to raise money to make money.
I expected the prop trading can be set up much easier. But it’s not. The above mention way is good to start small.
The easy setup is only possible in Forex and Foreign stock exchanges. But in Indian market its not an easy task
Mindvoice - Does Nithin feel irritated if I ask more?
Multiple people trading of one account or people managing others’ money leads to a lot of fraud & litigations. So yeah, in any well-regulated market, it isn’t easy for anyone to do this. There will be an entry barrier of sorts.
Nah, go ahead and ask. The way I think of this is knowledge put out on public platforms will only make my life simpler in the future.
Facility of placing orders on proprietary account through trading terminals shall be extended only at one location as specified / required by the members. These location is defined as “Default Location”
Prop Desk must trade on the specified location.? If a Prop desk firm wishes to hire remote traders, that’s not possible?
In India lot of traders struggle to get decent capital. In forex, There are a lot of Prop firms that we can join remotely. Why can’t this be for the Indian Market? Is there any legal issue to hire remote traders in prop Firms?
In India Prop firms works silently.? We can’t find prop firms on google search.
In your experience prop trading business in India have potential? (I agree the regulation, license fee, Infra cost etc are very high) if ignore that, Prop trading business is good?
Pro account refers to brokers trading for themselves on the exchanges through dealing terminals. All dealing terminals’ location has to be registered on the exchanges.
Prop shops aren’t necessarily brokers themselves on the exchanges. So this regulation wouldn’t be applicable to them. If prop shops are hedge funds, partnership firms, NBFCs, etc this regulation wouldn’t apply.
Forex, Crypto, etc aren’t regulated well. I guess you have seen what is happening with the Crypto world with all the freedom trading firms have, 3AC capital, Alameda research, FTX, etc. Many such incidents have happened in the Forex world as well. I think regulations are important.
You can hire remote traders, you just need approvals on the location if you are giving dealing terminals to traders as a brokerage firm.
It is the same in all well-regulated markets. Most prop trading houses are extremely quiet and don’t talk about what they are doing.
Prop trading business makes sense only if you can first consistently make profits in different market conditions with your own funds. If you can, then you can think of scaling it.
If you are trying to find traders who can trade for you and generate returns, that is really really hard. Not just in India, but anywhere in the world. Most good traders who are making money consistently are tough to find and if you do, they are unlikely to join you unless you allocate much larger capital than what they are already currently trading on.
Forget about the billionaire part: How many teachers/professors do we know who can answer questions about their own subject, with the clarity that @nithin shows in whatever he shares here/elsewhere?
(And now add back the billionaire part, and wonder!)
After get the Alpha Membership from NSE , where do our trading capital is parked? Who is responsible for credit / debit of profit and loss? How this works in Alpha Members?
Does alpha members also have intraday leverage?
Alpha Members required any membership from Cdsl or Nsdl?
If you take Alpha membership across NSE and BSE, you’d have to keep deposits of approximately Rs 70lks with the exchange. You get no exposure for this deposit. Here is the NSE requirements.
When you become a member, you can either be self-clearing or use a professional clearing member. If you are self-clearing, all the funds on which you want the margin is kept directly with the clearing corporation. If you use a PCM, it lies with them instead of the CC.
You need to have sufficient funds kept to cover the losses. If your fund utilization exceeds 90%, the terminals get blocked. So there is no additional leverage; you can use only up to a max of 90% of your funds.
Trading membership can be alpha; you can decide to become a depository participant with NSDL or CDSL or use an existing DP as your partner. No concept of alpha membership to be a DP; you will need a normal membership. Here is the link to learn more about becoming DP with CDSL.
The membership, I think, is a couple of lakhs. You can check the earlier link.
Yeah, you will have to keep with PCM like Globe if you use them. Starting Feb 2023, even PCM will maybe give exposure only up to 90% of capital parked with them. They might charge an additional interest to give you the 10% more, since they would have to fund it through their books.
When you say P&L they will manage, they will ask you to pay the losses or credit the profits to your account with them.
Two clearing corps in India. NCL is NSE’s subsidiary. ICCL is BSE’s subsidiary.
PCM
If you are doing only F&O or intraday trading, you don’t need a DP as you will not hold stocks. Even if you hold stocks, it is best to partner with a DP vs trying to be a DP. There is no concept of Alpha membership when you take membership with a depository (NSDL, CDSL) to become a DP. I don’t think it is worth the effort for an alpha member to be a full-time DP.
By the way, the biggest cost of being a broker isn’t any of the above. It is the compliance cost. You will have many reporting requirements. Failing can lead to hefty penalties. So you will have to invest in at least a two-member compliance and ops team.
As I had mentioned earlier in the thread, unless someone is trading with 10’s of crores, I don’t think it is worth the effort, especially in a world where brokerage rates are as low as it is today.
What about leverages like 5x in equity intraday, or 4x in f&o mis/nrml…how are these structured for aplha members who trade their own capital ? @nithin
In equity intraday trading, the clearing corporation only ask 20% on intraday basis. So the leverage kind of comes baked in for intraday. SEBI blocked any additional leverage, so anything more than 5x or 20% isn’t possible.
In F&O also, now there is no additional leverage possible. As an alpha member, you need to have 100% of the margin required in your account.
