How to Start a Prop Trading Firm: Ins and Outs (2024)

Jan 30, 2024

8 min read

How to Start a Prop Trading Firm: Ins and Outs (1)

All thanks to ESMA’s tightening of CFD trading regulations, a growing number of FX and CFD brokers started looking into adding prop trading to their business models or even switching to prop trading altogether. This has resulted in a booming prop trading industry: prop trading firms aren’t heavily regulated as they provide their trading funds to clients and then share profits.

Whether you want to start your prop trading firm or add a prop trading offering to your existing brokerage, the best time is now. This article will explain how you can set up a prop trading business quickly and easily. But, as usual, let’s dive into the basics first.

What is prop trading?

Proprietary trading (aka prop trading) is a form of trading or investment when a trader or investor is provided with funds by a broker to make a profit. Before a broker provides funds, a trader must go through an evaluation process to prove their skills. A prop trading firm only offers access to real funds after a trader completes this trial.

How to start a prop trading firm?

Starting a prop trading business is pretty straightforward:

  1. Get in the loop about the financial industry, get proficient in trading and investing, and work out your high-level business ideas.
  2. Get into details—transform your high-level ideas into a comprehensive business plan that includes your objectives and strategy.
  3. Register your company according to local regulations.
  4. Find and set up trading technology you’ll offer your clients and use to manage your exposure.
  5. Hire your staff to run the dealing department, helpdesk, marketing, etc.
  6. Develop your marketing strategy, launch a website, and start attracting clients.
  7. Work out a risk management strategy and target clients that need to be hit during the evaluation process.

Learning about the industry

Before diving into the prop trading business, it’s worth doing comprehensive research and talking to those already involved in the prop trading scene. It’s also crucial to learn the regulations of your target markets from A to Z and track all changes.

If you’re not that well-versed in legal matters, work with consultants and lawyers. The associated costs will pay off when your reputation is squeaky clean, as you’ll work strictly within legal frameworks. This will help avoid fines and legal issues and attract clients, as they know you run a reputable and reliable business.

Working out a detailed business strategy

Meticulous planning is key to escaping surprises during the implementation stage. Plan out the technology you’ll need, how much it costs, how many people you need to hire, how much you need for their payroll, and just how much you need to keep the lights on.

Do proprietary trading firms need a license?

Prop trading firms are less heavily regulated than regular brokerages and broker-dealers. However, if such laws apply, you must still properly register your business and get licensed.

For example, in the US, CFD trading is prohibited, and you can only offer prop trading of exchange-traded securities. To be able to do that, you’ll need to adhere to the US prop trading regulations and get licenses from the SEC and FINRA.

Finding the right technology

An easy, affordable, and bullet-proof way to launch a prop trading business is via a prop trading platform. It provides all the tools for managing clients and exposure and professional experience for your traders.

For your staffFor your clients
• Risk management specific to prop trading: automated and performed in real time, with maximum drawdowns and profit targets.
Trading simulation environment to evaluate your clients before providing them with real funds
• Dashboard for managing traders and operations
• Automated creation of trading contests
• A modern professional trading platform that makes your clients feel like pros
• Widgets for traders to track their trading activity and performance
• Technical analysis tools
• Advanced charting with turnkey and custom indicators

How can Devexperts help?

At Devexperts, we offer a complete package for prop trading startups and brokers wanting to add prop trading to their offerings. Our white-label prop trading platform is based on the DXtrade trading platform, includes everything mentioned above, and allows you to launch at a cost-effective rate in a week.

We call DXtrade the whole package because it comes with all essential integrations, including CRM, market data, and liquidity providers.

You can learn more about why trading software is at the core of white-label prop firms in this article about the challenges of prop trading firms.

How much does it cost to set up a prop firm?

It depends on the location and your target market, but if we’re not talking about the US, then as little as $15,000 might do—for example, the basic DXtrade package costs just $5,000. The rest of the funds are required for all the measures described above.

Most prop trading firms provide access to real funds only after carefully evaluating their traders’ abilities, and traders usually have to pay a sign-up fee before entering the trial process. In some cases, proprietary trading firms provide access to live trading for a certain fee, but the funds provided aren’t substantial, and monitored trading metrics are strict.

Are prop trading firms profitable?

The profitability of prop trading firms directly correlates to their ability to attract clients, keep them engaged, and keep traders within imposed risk exposure limits.

The latter is easily implemented with the right prop trading technology with real-time exposure monitoring. Brokers should set up maximum drawdowns, so if your client loses more than a predefined percentage of their initial account balance, all their positions will be automatically closed. The client will have access to their account in read-only mode.

It’s also necessary to indicate profit targets. This setting ensures your clients don’t win more than a specific percentage of their initial account balance. If a client’s account value exceeds the initially added percentage threshold, all their positions will be automatically closed.

This way, prop trading firms ensure they stay profitable.

Attracting and retaining clients is another challenge that needs tackling from the marketing department. A clear branding strategy, a strong reputation, and positive reviews from existing clients might help. Regular trading contests are a mighty tool for prop trading firms to engage clients.

Conclusion

That’s our take on how to start a prop trading firm. As with any other brokerage business, it requires careful planning, thorough research, and adherence to local regulations. A prop trading firm can thrive in the current market with the right strategy, technology, and risk management plan.You can simplify the process and provide access to all necessary tools and integrations cost-effectively if you get a white-label prop trading platform like our DXtrade.

Contact us for a consultation on how to start a white-label prop trading firm.

How to Start a Prop Trading Firm: Ins and Outs (2024)

FAQs

How much money is needed to start a prop firm? ›

To summarize, the amount of money you need to open a prop firm can range from $10,000 to $1 million, depending on the type of prop firm, the technology, the registration, the liquidity, and the CRM tool.

How do I start my own prop trading firm? ›

How to Start a WL Prop Trading Firm?
  1. Dealing with Regulations. Understanding Regulatory Framework. ...
  2. Partnering with a White Label Provider. Research and Selection. ...
  3. Technical Setup and Customization. Customizing the Trading Platform. ...
  4. Continuous Improvement and Compliance Monitoring. Performance Analysis.
Jan 10, 2024

How hard is it to pass prop firm? ›

With the Prop Firm challenges, it's not just about failing or winning. You must be profitable and fulfill certain trading objectives which makes it even harder. Less than 1% of traders who attempt the challenge pass and get funded.

How to pass prop firm challenge fast? ›

Tips for Passing a Prop Firm Trading Challenge
  1. Understand the Rules of Engagement: ...
  2. Master Your Trading Strategy: ...
  3. Risk Management is Non-Negotiable: ...
  4. Leverage Your Analytical Skills: ...
  5. Stay Disciplined and Patient: ...
  6. Continuous Learning is the Key: ...
  7. Embrace Feedback and Adapt: ...
  8. Simulate Real Trading Conditions:
Feb 5, 2024

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