Becoming a trader has now hit mainstream media, increasing interest in becoming a trader and opening up trading firms, such as a prop trading firm.
Prop trading firms are a lot more attractive to traders due to how lucrative of a career it can be for successful traders.
While traditional, brick and mortar prop shops aren’t as popular, the rise in interest mainly revolves around online demo prop shops.
This article will be focusing on opening up the latter.
A demo prop shop refers to firms that operate entirely online with no physical offices.
This remote working arrangement provides traders with the opportunity to enjoy the flexibility of working from home and setting their own hours while allowing the online prop shop to operate without necessarily having a license.
You have to go through a few steps if you want to start your own prop trading firm.
So, in this article, I will cover four steps that I believe are essential when it comes to successfully starting and running it.
What Is A Prop Trading Firm?
Before we get started, let’s clarify what a prop trading firm is.
Traders working for a prop trading firm trade with funds or seed money provided by their employer or sponsor.
Occasionally, traders can put in their own funds to help absorb losses, but prop firms provide capital based on certain criteria regarding a trader’s performance and drawdowns.
Online ‘demo’ prop trading firms recruit new traders by providing them demo accounts.
New recruits use these demo accounts to trade on a simulated market to try to meet the verification requirements set by the online prop firm.
When a trader qualifies, they are provided with a funded account by the firm. The profits traders make through trading are shared between the firm and the trader.
This is what separates prop firms from other financial institutions, as prop traders do not trade for other clients. They trade for themselves with their own capital.
How Do You Start A Prop Trading Firm: 4 Steps
There are certain things you should do as a trader before you start your own prop firm.
Such as working as a trader to gain relevant experience and working with a prop firm in order to get the correct exposure.
Although not doing those won’t stop you from starting your own prop trading firm, it will definitely make life a lot easier for you and give you a much higher chance of survival and finding success when compared to someone with zero prop trading exposure.
The process of creating the actual online prop shop involves four major components:
The initial step in the process to start your own prop trading firm is to select the appropriate white-label technology to work with.
White labeling refers to one company using a licensed software product from another company, rebranding it, and selling access to it as their own platform.
White labeling is essential as a prop trading firm because you need to provide a bespoke trading platform when recruiting new traders to work for you.
The technology platform you choose to work with has to have the architecture to accommodate your specific trading needs.
A good example of a company that provides these services is Trading Technologies.
They have several cases studies on their website highlighting how different firms have made changes to their base platform to address their specific needs, such as the ability to test new markets that a firm hasn’t previously traded in before.
After settling on the right white label technology, the next step to start a prop trading firm is to obtain a license to operate and register your business as a trading firm.
Getting a license isn’t a mandatory step. However, there are crucial factors as to why I believe getting a license is essential to your long-term success.
Although not a current legal requirement to open an online prop trading firm, not having a license can lead to operational challenges further down the track.
For one, several liquidity providers cannot legally work with unlicensed firms and an unregulated money manager. It can also limit your banking options.
While this may not be an immediate issue as regulators are always a long way behind when it comes to emerging technology, it will always be beneficial for a growing prop firm to obtain a license.
Now that you have a registered business, the third step to start a prop trading firm is to find ways to obtain liquidity, without which you essentially cannot operate.
The two purposes for liquidity are for the pricing and execution of all your trades.
There are a number of ways you can raise capital, with the two main ones being:
- Approaching high net worth individuals through your trading network
- Raising capital through online investing marketplaces
The fourth and last step to start a prop trading firm is to invest in a CRM tool. This step in the process is entirely up to you.
For all intentions and purposes, you are in business after you complete the third step, which is gathering capital for liquidity.
If you are looking to create a website for your trading firm and would like an online portal to manage new investors, a CRM tool will be helpful in that case.
A great example of a trading-appropriate CRM software is TradeSmarter CRM.
They provide a comprehensive system that allows you to generate statements to carry out real-time financial analysis of your business.
It carries out complex tasks behind the scenes to prevent redoing tasks and eliminate mediocre work while putting your customer base first.
The Benefits Of Starting A Prop Trading Firm
When a prop firm is set up correctly, it can become very profitable for everyone involved. From the traders to the investors to the firm owners, a prop firm can be beneficial for all.
Highly experienced traders look to quit their regular trading jobs to join prop firms as there is no hard limit to how much a prop trader can earn as opposed to a job with a set salary expectation.
As a result, prop firms get to enjoy the large amounts of profits brought in by these experienced traders.
When investors see how well the firm is performing, this incentivizes them to increase their investment value.
Some of the other benefits of starting a prop trading firm are:
- Proprietary trading firms get to keep 100% of their profit without having to redistribute it amongst their clients.
- Prop firms are allowed to keep a stockpile of securities which they can later loan to clients who are looking to short sell.
- Prop trading firms have their bespoke trading platforms, which are only available for traders they employ. The firm benefits from this as traders are usually expected to pay fees to be able to use that software.
- The bespoke trading platforms are sophisticated pieces of software that give the firm and its traders the ability to automate and engage in high-frequency trading. Traders are able to test ideas by running demos on these platforms.
- Due to the large capital prop traders trade with, they essentially become market makers and have the ability to influence investor behavior.
- Online prop trading firms provide a completely remote work schedule for their traders, giving traders freedom, and prop firms pay fewer overhead costs.