How to Launch a Successful Prop Trading Firm

Estimated at $6.7 billion in 2020, the prop trading market is forecast to expand at a CAGR of 4.2% from 2021 through 2028. Prop trading not only offers additional revenue streams to brokers, but also the chance to add more experienced traders to their client base and build their brand image in a more cost-effective way.

The Mechanics of Prop Trading

While earlier, proprietary trading involved hiring professional traders on a profit-sharing basis, its modern version has many more dimensions. Prop trading firms conduct competitions or challenges that traders need to attempt and pass to prove their mettle. Some brokers even charge an entry fee for this evaluation stage. It gives them additional revenues, while encouraging participation from only those traders who have some experience. The challenges are often done on demo accounts, with virtual funds.

Traders who qualify in the evaluation phase are given real funds to trade. This is a win-win for brokers and traders. While traders get to trade with more funds than they would otherwise have, brokers get a share of the profits made. Brokers that offer prop trading vary the challenges, methodology and percentage profit splits. 

Sharing a part of the trading profits gives brokers a chance to benefit from market movements rather than depending on the typically thin spreads or low trading commissions.

Advantages of Starting a Prop Trading Firm 

There are several benefits of offering prop trading:

Broad Market Access

Significant early-mover advantages are up for grabs to explore the global markets with the right trading talent.

Income Diversification

Prop trading opens diverse revenue streams for a firm, such as:

• Fees from traders who participate in competitions.
• Challenges to double the capital or replicate the growth in emerging markets.
• Sharing profits with selected prop traders who trade on the firm’s behalf.
• Selling profitable set-ups as copy-trading templates and EAs.

Lower Operational Costs

Attracting traders for a brokerage through the traditional sales funnel is usually cost-intensive with no way to estimate the ROI. However, the cost-per-hire is significantly reduced through competitions and challenges, with an opportunity to extract profits at every stage of the process of filtering prospective traders and forming profit-sharing collaborations with expert traders.

Easier Money Management

Conventional multinational brokerages have a capital inflow in diverse currencies. Regional taxation regimes, payment methods and settlement cycles make money management complex and financial practices rigid. Prop trading firms use their own funds, which makes money management a lot easier. The currency conversion risks are borne with traders, as they receive money and need to share profits in the preferred currency of the prop trading firm. 

Less Regulatory Complexities

Regulators are yet to roll out detailed guidelines for the prop trading sector. Generic KYC, AML and reporting regulations reduce non-compliance risks, allowing prop firms to focus on trading activities and business growth. 

Steps to Starting a Prop Trading Firm

A little careful planning and partnering with the right liquidity provider can ease the journey to establishing your own prop trading firm. Here are some steps that can help.

• Find a Platform Provider

A prop trading platform primarily has three dimensions – trader acquisition module, trading tool kit and a performance monitoring and compensation platform. Establishing a technology development team is time-, cost- and effort-intensive. You can reduce your time-to-market and save resources by partnering with a cutting-edge technology provider with solutions that allow you to acquire talent, explore markets and share profits seamlessly.

• Build Your Tech Stack

The key to maximising potential profits in the financial markets is to provide your traders with state-of-the-art technical analysis, real-time data feeds and lightning-fast execution. Expedited price discovery and decision-making are crucial to making the most of market opportunities. A technology solution with cross-connected feeds straight from the sources and time-priority execution prove beneficial here.

• Prepare the Legal Side of Things

Although the prop trading space is still loosely regulated, adequate reporting and ongoing compliance are critical in the industry. Staying on top of the evolving regulatory landscape helps remain relevant and competitive in the long run. Did you know that licensed technology and liquidity providers can reduce compliance overheads significantly?

• Integrate a Prop Firm Liquidity Provider

Making adequate liquidity accessible to your traders across a wide range of instruments is crucial for maximising the opportunities they can explore. This also amplifies your potential for gains. Plus, access to exceptional technology and robust risk management helps mitigate potential losses.

• Create Investing Challenges

Creating the right investing challenges can help you identify the best talent in the market. You must create challenges that test the psyche, swiftness in decision-making, risk management skills and consistent profit-generation capabilities of contenders.

• Prepare a Marketing Strategy

The marketing strategy for prop trading firms is different from that of brokers. Your campaigns should be compelling enough to attract top talent. Conducting market research on the best times, channels and markets to target can help. Position your brand for credibility while highlighting competitive profit-sharing opportunities and the latest market analysis tools to enable fast and informed decision-making.

• Create a Risk Management and Security Strategy

Having a robust risk management and security strategy is a business imperative for proprietary trading firms. This is why most prop trading firms hire a team of risk analysts who assist traders in managing risks. This involves setting investment caps, profit-sharing caps, trading benchmarks and providing real-time risk management support. 

• Ensure Continuous Monitoring and Improvement

Continuous monitoring helps you identify the bottlenecks in hiring, trading, liquidity and risk management activities. Data-backed insights can help incrementally improve processes to maintain growth in the prop trading market brimming with opportunities. 

Conclusion 

A prop trading firm needs reliable trading technology and institutional-grade liquidity with transparent fee structures. X Open Hub’s state-of-the-art technology and liquidity solutions empower businesses to develop cost-optimised business models that increase profitability and operational efficiency. With deep liquidity across more than 5,000 instruments and multiple licenses from tier-1 regulators, we are the preferred partner for those looking to succeed in the financial markets. Our cloud servers, located across the globe in world-class data centres, ensure uninterrupted operations. Multiple integrations drive interoperability across diverse platforms for frictionless operations. Speak with our team to learn how X Open Hub can support you in launching and growing your prop trading firm.