Proprietary trading, or prop trading, involves firms using their own funds to trade financial markets, aiming to make direct profits rather than on behalf of clients. Learn more about the conepts behind prop firms below.
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This page aims to explain what proprietary or ‘prop trading’ is, the advantages and risks of prop trading, and how to get started as a prop trader with a funded account. We also listed the best proprietary trading firms in 2024 if you’re looking to get started.
Prop Trading (Proprietary Trading) signifies firms using their own dosh to transact in varied financial instruments, with examples encompassing high street banks and hedge funds. The primary goal is profit accumulation through capitalising on market inconsistencies.
Two avenues exist for prop commerce: in-house at a dedicated desk, or remotely via an internet service provider, the latter being more within reach for retail traders.
Unlike traditional trading, prop commerce benefits the firm. However, traders cop a share of the profits, in some cases, up to 90% or even a whopping 100%. The firm profits from its share, commissions, and account qualification fees.
Prop commerce can be executed through two primary channels: at an in-house trading desk or digitally.
The traditional route into prop commerce involves applying to a firm to join their trading team. During the interview, one’s trading acumen and experience is examined. If successful, one receives mentorship from seasoned traders and gains access to the firm’s capital for trading purposes.
Starting with a modest budget is the norm until proven trading prowess is demonstrated. Profit realisation may span between 6 to 18 months. Notably, demand for these positions is substantial.
An alternative to the traditional model is online prop commerce. This model eliminates many entry barriers and opens the field to anyone with a passion for trading and a basic understanding of it.
An audition, usually requiring a small fee, is still required by most firms. This process serves to validate your potential as a profitable prop trader, earning you access to a funded account. Occasionally, additional fees such as commissions may be levied by some firms.
Prop trading can be a fitting pursuit for anyone with trading experience and a discerning understanding of trading practices. Acquiring these skills can stem from diligent practice and meticulous research. A triumphant prop trader needs skill, experience, and a potent trading strategy.
As a retail trader, your route will likely be through online prop commerce. Owing to its accessibility, this method has experienced a surge in popularity. Its less stringent qualification requirements make it a more appealing option compared to traditional prop desk positions, allowing those with less experience or without a finance background to step into the realm of prop commerce.
Presuming your interest in prop trading, it’s likely you’re keen to get started without undue hassle. Therefore, our emphasis is on online prop commerce, given the traditional method’s suitability for those with more experience and a finance background.
The dawn of digital prop trading has simplified the process, making it more accessible and a preferred option for retail traders commencing their journey. Despite this, comprehensive knowledge of financial markets and trading is crucial as prop trading, like all types of leveraged trading, carries potential risks.
To initiate trading with a digital prop trading firm, an audition fee is required. This serves as a qualification process, ensuring that the firm’s capital allocated to you for trading is not at risk.
The audition process, while varying across firms, usually mandates an increase in your account balance by 10%, with a maximum loss cap set at 5%. The constant use of a stop-loss order is also typically required. Failure results in forfeiting your audition fee, but reapplication with a new fee for another attempt is an option.
Digital prop firms largely operate in an unregulated environment, hence comprehensive research is crucial due to the myriad of firms available, each offering unique propositions.
Before diving in, it’s essential to understand that while there are considerable advantages, significant risks are also part and parcel of the journey. Being aware of these is crucial prior to embarking on your prop trading journey.
Prop trading bestows a multitude of benefits on firms and traders alike. A salient advantage for traders is the capacity to handle large volumes of financial instruments sans personal financial risk. As a client leveraging the firm’s capital, a significant personal investment isn’t requisite for accessing a funded account.
Clients benefit from direct market engagement, bypassing intermediaries or market makers that some retail traders contend with. This enables prop traders to respond swiftly and effectively to shifting market conditions. Moreover, clients can effectively operate as wholesale traders, facilitating access to enhanced liquidity, amplified leverage, and the scope to diversify portfolios.
Prop trading firms commonly provide access to multiple trading platforms, rebates for augmenting market liquidity, and exceptional customer support.
Most prop trading now occurs online, vastly expanding the potential trader pool.
Despite its numerous boons, prop trading isn’t without risks. Notably, the potential for significant losses looms large. Given that prop traders use the firm’s capital, a trade’s success or failure can materially affect the company’s financial stability.
Additionally, the highly competitive and fast-paced nature of prop trading can make keeping pace with market changes and making informed decisions a daunting task. It typically necessitates an experienced trader with substantial trading acumen to excel as a prop trader.
Many prop trading providers offer an audition process with virtual money before granting access to a live trading account. This trial may entail adherence to risk management parameters such as daily stop-loss usage and not exceeding a specified daily portfolio loss limit.
Numerous proprietary trading tactics exist that traders can utilise to generate profits.
Prominent strategies encompass short selling, scalping (akin to day trading), and momentum trading. All these tactics are designed to exploit market inefficiencies and capitalise on price discrepancies.
One of the pioneering prop trading tactics is arbitrage, which manifests in various forms, including index arbitrage, volatility arbitrage, and merger arbitrage. Essentially, arbitrage involves capitalising on price discrepancies across different markets. For example, if an asset’s price varies between two distinct markets, arbitrage entails purchasing at the lower price and selling at the higher price to secure a profit.
However, each tactic carries its unique array of risks and rewards. Consequently, traders should thoughtfully consider their objectives and risk tolerance prior to settling on a strategy.
There are several steps to carving a successful path as a prop trader:
Following this, you have two options:
Before approaching a prop trading firm, it’s recommended to start with these steps.
Several renowned prop trading firms, such as Level Up Trading, SurgeTrader, FundedNext, Ment Funding, FTMO, My Forex Funds, and the Lux Trading Firm, cater to traders’ diverse needs. It’s vital to undertake a thorough investigation of each firm’s credibility through online user reviews and testimonials.
For more info, read our full SurgeTrader Review or FTMO Review.
After choosing a prop trading firm, account creation is generally simple, albeit procedures may vary among providers.
Most firms require a test evaluation process to open an account, often involving a one-time fee and an audition using virtual funds in a real-market test account. The goal is to generate typically a 10% profit. Some firms enforce risk management rules to filter for proficient traders.
The tradeable financial instruments hinge on the prop trading firm. The range is vast, from forex to CFDs to options, as long as the firm facilitates it.
Prop trading firms typically offer a profit split of 20% to 50%, some extending up to 90%. Firms only profit when their prop traders succeed, and traders commonly retain most of their earnings, a substantial lure for prop traders.
Prop trading, tracing its lineage to the 1980s, was a realm initially restricted to resource-rich financial institutions. Banks, traditionally engaged in accepting deposits and lending for profit, started investing these funds in financial markets for client returns.
However, the banking industry’s deregulation in the 1980s and 1990s sparked a transformation. Banks began investing not just for clients, but also with their capital, often through a prop desk.
A prop desk, essentially a trading hub, allows prop traders to speculate on market trends, from shares to real estate to intricate derivatives, operating akin to an in-house hedge fund.
Fast forward to today, technological advancements and financial industry growth have made prop trading increasingly attainable for a wider range of investors and traders.
Proprietary trading experienced a significant surge on Wall Street in the late 1990s and early 2000s. The advent of computers and the progressive sophistication of algorithms facilitated rapid analysis and execution of trades across various financial markets. This development resulted in substantial earnings for banks, with some traders pocketing millions annually.
Driven by these substantial earnings, proprietary trading became an integral aspect of numerous banks’ operational models. Some even established standalone units exclusively for this form of trading. However, these profits were not without substantial risks.
Once you pass the qualification stage, you’ll be equipped with a funded program based on the capital you’ve committed. Accounts can commence with as little as $25,000 in capital and can scale up to a maximum of $4 million, depending on the firm.
Certain prop forex trading firms may also impose ongoing commission fees once you’ve qualified for a live account.
The financial crisis of 2008 shed light on the risks associated with proprietary trading, underscoring broader issues within the banking industry. Banks actively involved in proprietary trading experienced massive losses, which led to considerable write-downs and eventually to the rescue of several major financial institutions.
In reaction to this crisis, regulatory bodies introduced new regulations intended to minimise the risks associated with proprietary trading. The most significant among these was the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, incorporating the “Volcker Rule.” This rule curbs banks from engaging in proprietary trading and restricts their capacity to invest in hedge funds and private equity funds.
In the recent past, proprietary trading has faced heightened examination from regulatory authorities due to apprehensions about financial solidity and potential market manipulation.
Consequently, numerous countries, including Australia, have set limitations on funded trader programs and introduced augmented reporting obligations for firms indulging in this type of trading.
Regardless of these constraints, proprietary trading continues to be a favourable and rewarding pursuit for numerous financial institutions and traders, including those in Australia.
In summary, proprietary trading is a financial trading form that utilises a firm’s capital to trade various financial instruments like stocks, bonds, currencies, commodities, and others. While it does present several advantages such as swift and efficient trading, proprietary trading also carries substantial risks and isn’t typically advised for novices. Before delving into proprietary trading, traders and firms should thoughtfully evaluate their objectives and risk appetite.
The primary aim of proprietary trading, seen through the lens of an Australian trader, is to earn profits for the prop trading firm by capitalising on market anomalies and seizing lucrative market opportunities. As long as the trades are fruitful, the firm and the trader partake in a mutually beneficial profit-sharing arrangement.
The primary benefits of proprietary trading, from an Australian trader’s viewpoint, include profit participation and commission generation for the trading companies. On the other hand, traders have the advantage of leveraging the firm’s capital, which allows them to assume higher risks and potentially reap substantial portions of the profits.
From the perspective of an Australian trader, the most significant risk associated with proprietary trading is the possibility of substantial losses, given that the firm’s capital is being used for trading activities. Furthermore, the nature of proprietary trading demands a high degree of trading expertise and a proven success record, which can present a formidable hurdle for beginner traders.
Choosing the right prop trading firm is crucial for your success. Consider these key factors to ensure the firm meets your trading needs and goals. Here are ten important aspects to evaluate.
It is important to use a trading platform that not only has the essential tools (such as right charts and analytical tools) to help you make better trading decisions but also a platform you are comfortable using. You will find many firms offer MetaTrader 4 or MetaTrader 5 since these are relatively popular mainstream platforms and well liked by traders across the world but some offer other platforms which may suit the needs of different traders.
A prop trading firm should have include an education suite so you can improve your skills as a trader. trading programs might consists on videos, e-books and courses about necessarily topics related to trading.
A good prop firm will also have good support, this includes a responsive and knowledge customer service team and while the support team can’t provide trading advice they can ensure you can find the information you need. Most firms will have customer support via live chat but some may use a chatbot rather than human and no all are 24/7. and FAQ/help/support sections on the prop firms website.
A prop firm needs to know that you have the trading skills to make profits with the funding they give you, for this reason most will require you to pass an evaluation or audition process. While there are some that do skip the evaluation process, most will have a one-step or two-step evaluation.
As a trader, you will want a profit share arrangement that is favorable to you. Expect most firms to to have a profit splits as low as 60/40, with 80/20 or 90/10 quite common. Some may allow you to keep 100% of the profits, usually with conditions attached.
Some firms start with a lower profit split and reward you with a better split as you prove your skills. You may also find that some firms allow you to buy your way into a better split arrangement.
One of the big advantages of prop trading is that you can access more funds to trade with than you might be able to use if you were using your own capital. Funds available generally start from $10,000 and can go up to $1,000,000 (possibly higher in some cases).
Being able to access more funds obviously does provide opportunity to greater returns but it can also mean greater risk and therefore responsibility. With this in mind, keep in mind how much funding you really need for your trading style or strategy and only use funding amounts you are comfortable using.
At this time, Prop firms do not require regulation from the regulator of a countries financial markets, for this reason it is essential to look for a prop firm with a sound reputation.
Look for a prop firm that has many years of history as a prop company, firms that have been around a long time are likely doing something right. We at Prop-Firms like to check the prop firms online reputation (such as with Trustpilot) and also see if the firm has any black marks against their name in the news.
Where is the prop firm located? It might be smarter to trust a firm based on a developed country such as Australia, the UK and EU than one from a small country in Africa or the Caribbean. If you have a dispute, it might be easier to resolve if the company is based in your own country.
All prop firms have rules you need to follow, with some firms having more onerous requirements than others who have more relaxed rules. Some firms for example may require you to trade using a guaranteed stop loss while others may not allow hedging, scalping and possibly social trading.
Before the prop form will give you funds to trade with, you will need to pass the evaluation process. You will need to pay an audition fee to do the evaluation and this will be the main cost if not only cost you will pay. Generally speaking, the more funding you wish to access, the larger you evaluation fee will be. The other thing to keep in mind is what you will need to pay should you fail the evaluation and wish to try again, some prop firm may give you a discount.
Last but not least on are the trading products one can trade with. Most firms have trading with CFD products but some offer spot rather than CFDS and even futures in some cases. Also consider how many Forex pairs they offer, if you wish to trade with some exotics, you might wish to check the prop firm has these exotics before signing up.
