The co-founder and CEO of City Traders Imperium (CTI), an international proprietary trading firm, asks whether traders are being properly educated in risk management.
Martin Najat raised the issue in a July press release from Dubai, United Arab Emirates, where CTI, which was formed in 2018 with technology developed at a London startup, has an educational arm.
"Everyone wants to learn how to find a trade,” as Najat put it. “Almost nobody sits down to learn how to survive a bad week of them. That's the part of the job that actually keeps a funded account alive, and it’s the part getting the least formal attention.”
Najat cited two supporting pieces of research:
-- Do Day Traders Rationally Learn About Their Ability? (2017), by Brad M. Barber of the University of California, Davis, and co-authors from UC Berkeley and Peking University. They observed in two decades of Taiwan Stock Exchange data that day traders lose money in aggregate, unprofitable traders are more likely to quit than profitable ones, and a disproportionate share of day-trading volume is generated by traders with an extended history of losses who keep trading anyway.
-- The Use of a Financial Trading Room to Develop Risk Management Competency (2006), by R. Ashley Lyman and Robert W. Stone of the University of Idaho, describing a program there designed to build risk management competency through hands-on experience rather than lectures alone.
Martin Najat of CTI
“Position sizing, drawdown limits, and stop discipline get bundled into a challenge’s terms and conditions,” said Najat’s release. “They are rarely taught as a curriculum with the same weight as chart reading.”
It attributed to the CTI academy’s “dedicated trading psychology course alongside its strategy training” the fact that “83% of graduates . . . get funded by at least one prop firm. CTI argues the rest of the industry needs to catch up and treat risk education as a core part of preparing traders, not just a set of guardrails they discover by breaching them.”
Najat did not respond to attempts to invite further elaboration. But he did provoke opinions from experts in quantitative finance.
Stas Melnikov, head of quantitative research and risk data solutions at AI and analytics leader SAS, suggested looking at risk competence as resting on three legs, none of which is sufficient on its own: technical grounding, behavioral awareness, and lived experience through a real crisis.
On the first, Melnikov said the quantitative foundation many trading roles assume cannot be taken for granted; tha technical skills are often lacking in new graduates.
He recalled a conversation with a distinguished finance professor at an Ivy League school who ran into pushback from MBA students over introducing basic calculus while preparing to teach a derivatives course.
Stas Melnikov
"How can you study finance and not know calculus?” said Melnikov. "It is not possible to understand derivatives, risk or portfolio construction without a quantitative foundation.”
Melnikov then mentioned literature on behavioral finance and cognitive bias. Markets aren’t governed purely by “physics-like processes"; they are shaped by emotion, sentiment and cognitive bias, in traders and across markets. He pointed to Buster Benson's Cognitive Bias Codex as an accessible starting point, and to the CFA Institute curriculum as a more structured one.
As for experience, the hardest of the three legs to teach, Melnikov commented, “Reality is infinitely complex and cannot be reduced to a set of rules or equations. A simulation can never fully replicate the uncertainty, pressure and consequences of the real thing.” Richard Bookstaber's The End of Theory serves as a case study on the limits of models in the context of financial crises.
Aaron Brown rejected the CTI chief’s premise.
"In good university programs and major firm training, traders get extensive education, oversight and coaching in risk management," asserted Brown, a former AQR Capital Management risk manager and 2011 GARP Risk Manager of the Year, a Bloomberg Opinion contributor and author of the recently published Wrong Number: How to Extract Truth From a Blizzard of Quantitative Disinformation,
See also, by Brown, “Wrong Numbers and Risk Managers” in GARP Risk Insights.
“It could always be better, of course, and not every professional trader goes through a good school or institution, but risk management is built into the basic foundation of trading, not something bolted on afterwards.”
GARP's FRM certification for financial risk managers sets a standard for proving readiness and ability to assess, measure and monitor risk in real-world situations.
Brown highlighted that CTI’s customers pay entry fees to trade demo accounts and earn a share of what the company's own materials describe as "simulated profits . . . If they trained their customers properly in risk management, they would have no customers.”
Aaron Brown
He argued that the challenge format actually teaches the wrong lesson. Under a pass/fail structure with a fixed entry fee, busting an account on day one and falling just short of the profit target cost a trader the same amount: the fee already paid.
"Tail risk is free, so the optimal strategy is maximum variance," Brown went on. Thus a firm's drawdown limits and daily-loss rules are less curriculum and more a countermeasure to the incentive that the format creates.
"They are the house edge, not a curriculum.” A drawdown breach is, contractually, how an account ends. He compared the argument to a casino observing that most players leave once they’re out of chips. “They actually need games they can win."
Brown criticized the citation of the Barber paper, because the covered population and trading style were distinct from professional or institutional risk management. And he said the Lyman-Stone paper’s argument was not consistent with CTI’s.
“Neither [paper] says anything about how well traders are trained, and both suggest people should stay away from CTI, either because they'll almost certainly lose money or because they won't learn anything,” said Brown.
Brown agrees with Melnikov that surviving a bad stretch is a separate, under-taught skill from that of finding good trades.