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Prop Trading - The Power of Compounding

In this Prop Trading competition scenario, we explore how applying Flow Imbalance (FI) and Liquidity Reduction (LR) techniques impacts the stage-wise graduation rates and final payouts.

By reducing the graduation rate at each stage from 15% to 12%, the number of final graduates is cut in half, and payouts decrease by 63%.

Breakdown of Results

Without FI + LR Techniques (15% graduation rate):

  • Stage 1: 1,000,000 entrants × 15% = 150,000 graduates
  • Stage 2: 150,000 × 15% = 22,500 graduates
  • Stage 3: 22,500 × 15% = 3,375 graduates

With FI + LR Techniques (12% graduation rate):

  • Stage 1: 1,000,000 entrants × 12% = 120,000 graduates
  • Stage 2: 120,000 × 12% = 14,400 graduates
  • Stage 3: 14,400 × 12% = 1,728 graduates

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Comparative Impact

In the original scenario (15% graduation rate), 3,375 entrants graduate by Stage 3. After applying FI and LR techniques (12% graduation rate), only 1,728 entrants graduate. This reflects a 50% reduction in final graduates. The modest 20% reduction in the graduation rate per stage (from 15% to 12%) compounds significantly across stages.

Pay-out Impacts

Let’s assume that each graduate trades $100 million with an average profit of $55/M and at $40/M with FI and LR. Here’s the impact of FI and LR on payouts:

Without FI + LR:

  • Profit per graduate: $55/M × 100 million = $5,500
  • Firm payout (80% of profit): $4,400 per graduate
  • Total payout (3,375 graduates): 3,375 × $4,400 = $14,850,000

With FI + LR:

  • Reduced profit per graduate: $40/M × 100 million = $4,000
  • Firm payout (80% of profit): $3,200 per graduate
  • Total payout (1,728 graduates): 1,728 × $3,200 = $5,529,600

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Conclusion:

The payout is reduced from $14.85 million to $5.53 million, a decrease of over 63%, driven by the application of FI and LR techniques.

Further Reductions:

Risk management techniques can further reduce payouts by hedging payout risks.

Cost Efficiency:

By applying FI and LR, profit margins increase, allowing reallocation of resources into areas like marketing or platform development, strengthening the business's long-term outlook.

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