Forget about becoming a prop trader - have you considered launching your own prop trading firm?
It’s easier than you think!
When the forex industry was brought to its knees by the MetaTrader license shambles a new opportunity emerged from the rubble: prop trading. Many traders - even veterans with years of market experience under their belts, may be unaware of one secret in the trading industry: anyone can set up a prop trading firm. All you need is white-label software, funding, and a marketing strategy. Best of all? You don’t need a license.
Of course, it is not quite as simple as pushing a button and launching a lucrative prop trading firm. There will be steps to follow including implementing trading software, offering leverage to your traders, and ensuring you have the means in place to compensate for profits earned. With an increasing number of turnkey software - companies that take care of the entire process of setting up a new prop trading firm - you can simply outsource the arduous or formidable aspects of establishing your label. The legal aspects, domain, marketing, design, and access to capital can be done seamlessly sometimes in as little as two weeks.
So you’re already making a tidy profit as an independent trader. Maybe you are raking in big trades and seeing the fruits of your successful strategies fill up your savings account (or garage!). Why rock the boat, you ask? The answer is simple: leverage. Many traders, even those with access to decent liquidity, will be limited by their collateral (or lack thereof). The bigger the trade, the greater the potential profit. Prop trading offers leverage previously only dreamed about by most traders. Think of an amount - then double it. Prop traders can begin trading with as much as $1 million in their accounts. The prospects for magnifying trades are immense and don’t only benefit the prop traders but the firm itself. After all, the more successful the traders the higher the rewards for the firm itself. Now, imagine you own that firm.
Your traders will pay fees and commissions in return for accessing trading software to earn their profits. The flexibility of prop trading - remote, own hours, control over your capital - makes it an easy sell and soon you could have enough capital coming through your platform that you will be influencing the market yourself.
Before we take you on a step-by-step guide to launching your own prop firm, let’s make sure we understand the basics. What exactly is prop trading, how do these firms work, and are there any negatives to be aware of?
Proprietary trading, better known as “prop trading” is a form of financial investment whereby a trader uses a firm’s own money (as opposed to investors' or depositors' funds) to make profits. Prop trading may take place using a wide range of financial instruments, including stocks, forex, bonds, and commodities. Due to a large amount of capital oft being traded, many successful prop firms are thought to yield greater annual returns than investing in bonds, indices, or other more traditional forms of investment. The trades are generally speculative and often through a channel of derivatives.
Note that there is a wealth of literature online about various types of prop trading and these do not always refer to the same type. The old-fashioned type of proprietary trading, the O.G firms as it were, are traditional brick-and-mortar firms that employed prop traders on-site for a fee. The prop firms we are talking about here are fully remote and offer funded trading to independent traders, either in return for a fee and/or passing an assessment with access to capital and powerful software being offered for a share of any profits earned.
It’s simple really, let’s say you decide to start your bespoke trading platform. The prop firm (you) hires third parties (your prop traders). You provide the capital to which the traders have access in return for a fee, or after passing a rigorous assessment to filter out the most experienced and promising talent. The profits earned are shared between you and your traders, and the profit split varies from platform to platform but is generally in the traders’ favor.
Managing large quantities of capital, a wide range of financial instruments invested in, variety of strategies deployed - this sounds like a hedge fund, right? While those are three key similarities between prop firms and hedge funds the two are in fact very different. While hedge funds are managed by staff and managers, traders control the capital of prop firms. Hedge funds are subject to rigorous regulatory oversight, whereby prop trading firms do benefit from licensing but it is not a legal requirement. Hedge fund managers are also more strictly limited to certain approved strategies whereas prop traders have nearly free rein in this regard.
Another often unsung quality of prop trading is that it is open to anyone. If there is a tough entrance test in place traders will need to demonstrate their ability to make consistent profits - but there are no specific qualifications needed, years of background, or formal education to begin a career as a prop trader.
Now, onto the question of the day. How do you set up your very own prop trading firm?
You won’t get far in the Tour de France without a bike, and you will be quickly left behind in the prop firm race without the right white-label software. “White labeling” refers to the process of one company using licensed software from another and rebranding it under its own name. In essence, the underlying technology (often referred to as “turnkey technology”) behind many prop firms is the same, but with various add-ons and rebranding to give it a market edge. Several companies are offering this white-label service but it is worth doing a comparison of costs, turnaround time, and any special features included in the bespoke package. Make sure the trading architecture on offer fits the expectations of your ideal prop firm. Now is your moment - make sure you get it right!
At this juncture, many individuals will choose to obtain a license to register the business as a trading firm. Bear in mind that this is your choice - the license is not a legal requirement for prop trading and you may wish to save time and money by skipping this step. Consider your options carefully however, having a license from the get-go could make it easier to market your product and amplify your leverage options.
A prop firm without liquidity is like a bakery without bread. You need to ensure you have access to funding to bring traders onto your platform. You can seek funding by pursuing several avenues. One is to solicit investment from angel investors such as venture capitalists. Alternatively, you can source funding through online investment marketplaces.
You could launch your prop trading firm after the completion of step 3. While not mandatory, this final step is highly recommended. CRM stands for “customer relationship management”. Having internal tools or strategies to collate data and optimize the customer experience is critical for success. After all the loyalty and longevity of your traders (and the future of your funding) will depend on their sense of satisfaction and you need to keep your finger on this pulse.
So, now that we have covered the how we should ensure we are clear on the why. Is setting up a prop trading firm worth it? What are the key benefits and are there any drawbacks to be aware of? Let’s start with the negatives. It may be more straightforward than at first glance, but establishing your trading platform is still not a push-button business. Ideally, you would benefit from some trading experience and market knowledge yourself. Sourcing funding can be stressful and the ideal starting capital is not guaranteed. Trading can be a fickle business, and there is no contract in place to prevent your traders from jumping ship to a rival platform or simply stopping altogether.
Now let’s move on to the good stuff.
Here are just some of the alluring benefits of owning a prop trading firm:
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