Quantitative Trading, 2nd Edition

CHAPTER 4Setting Up Your Business

In this chapter, we will be taking a break from the technical aspect of trading to focus on the business side of it. Assuming that your goal is to remain an independent trader and not work for a money management institution, the choice of the business structure for trading is important. The main choice you have to make is whether to open a retail brokerage account or to join a proprietary trading firm. The next step is to determine what features of the brokerage or trading firm are important to you. Finally, you have to decide what kind of physical trading infrastructure you need in order to execute your quantitative strategy.

BUSINESS STRUCTURE: RETAIL OR PROPRIETARY?

As a trader, you can choose to be completely independent or semi-independent. To be completely independent, you can simply open a retail brokerage account, deposit some cash, and start trading. No one will question your strategy, and no one will guide you in your trading. Furthermore, your leverage is limited by Securities and Exchange Commission (SEC) Regulation T—roughly two times your equity if you hold overnight positions. Naturally, all the profits and losses will accrue to you.

However, you can choose to join what is called a proprietary trading firm such as Bright Trading and become a member of their firm. In order to become a member of such firms, you have to pass the FINRA Series 7 examination to qualify as a registered representative of a brokerage. You will still ...