Proprietary Trading Explained | Best Prop Trading Firms 2024 (2024)

Prop trading firms invest capital in skilled traders and split the profits. As such, proprietary trading can be an effective way for talented traders to generate returns without having to risk their own funds. This guide explains how prop trading works, from the initial challenge phase to permitted strategies, compensation, and regulations. To get started, use our ranking of the top prop trading companies for UK traders:

What Is Prop Trading?

Proprietary trading – also referred to as ‘prop trading’ – is the concept of retail investors trading with a company’s resources by using funded trading accounts. The prop trader uses company funds to speculate on popular markets and splits the profits with the supporting firm.

These speciality prop firms effectively ‘hire’ retail investors to trade on their behalf after a selection process designed to test the trader’s mettle on real markets. As a result, prop traders are often highly skilled and experienced with a proven track record of successful, profitable investments, and a consistent salary.

In exchange for their expertise, prop trading companies provide capital, sometimes to the tune of hundreds of thousands of pounds, and provide all the resources needed by traders to execute positions. This includes access to trading platforms and a selection of assets to trade such as forex and stocks.

Importantly, for retail investors, prop trading is generally the domain of organisations such as Earn2Trade, rather than investment banks like Goldman Sachs and JP Morgan.

How It Works

The majority of prop trading firms in the UK have several screening stages to find the most profitable traders to trust with their money. Aspiring prop traders will often need to complete a series of online trading challenges, evaluations, and interviews before being accepted for financing. The application process varies between prop firms.

Once the evaluation program has been successfully passed, the trader will receive capital from the proprietary trading house. Funding levels usually vary, with several account balance options offered based on factors such as the trader’s experience level and approach to risk management.

Most prop trading accounts are subject to frequent performance reviews and rules that must be adhered to, for example, an end-of-day drawdown limit, a maximum daily loss limit, and a cap on the number of open trades. Failure to adhere to these rules could lead to profile suspension.

How To Trade With A Prop Firm

1. Find a suitable prop trading company (details on how to compare firms below)
2. Register for the evaluation challenge/test/interview and pay any joining fees
3. Complete the assessment phase in line with the rules and requirements
4. Receive access to a loaded account with company funds
5. Start trading whilst adhering to the stipulations of the live account
6. Generate returns and receive payouts in line with the agreed profit split

Comparing Prop Trading Firms

With multiple proprietary trading firms available in the UK, traders should compare providers in several key categories:

Profit Split

This is often the most important factor for prop traders since it determines the size of payouts they could receive. The typical business model uses a percentage-weighted compensation schedule – for example, a 50/50 split or a 70/30 ratio. This can vary significantly between firms, financial instruments, liquidity, and the volume being traded. Earn2Trade, for instance, offers a competitive 80/20 split in favour of the trader.

But while many traders will gravitate towards prop trading websites that let them take home the most profit, there can be disadvantages to these splits, such as higher account maintenance fees. At the same time, some of the firms with lower splits offer additional services that may be useful. London-based firm, Audacity Capital, for example, offers a 50/50 profit split but provides access to a simple scaling plan with a solid range of educational and training materials.

Note, you may be liable for taxes in the UK based on your profits.

Assessment

Prop trading firms call their sign-up test a range of different names – challenge, assessment and evaluation are all common. But while the names and exact details of these tests vary, they almost always involve achieving a set profit level within a specified timeframe – 10% profit in the first month’s trading is common.

Online Assessment

Some prop firms conduct their assessment on a demo account, while others allow prospective traders to start with a small amount of capital while they test their skills.

There will be a list of rules and requirements to adhere to, including time restraints, maximum drawdown, the highest losses allowed, and the use of leverage.

For example, budding prop traders may have to demonstrate a winning strategy by achieving a 6% profit margin and not losing more than 5% of the initial account balance within 30 days.

Some firms may set one, two, or even three steps with different requirements within their online evaluation. Look out for those with flexible time frames, clear rules, and simple phases to follow.

The best prop trading firms also provide the opportunity to complete the assessment again if failure occurs.

Interview

There are also a few firms, including Audacity Capital, which forego the evaluation entirely, instead selecting traders through an interview process.

This will usually still require proof of a successful trading history and evidence of profits made within a live trading environment.

Experienced retail investors are joining the firm with a wealth of experience and opportunity for the proprietary trading company, so check if additional bonus incentives or enhanced profit splits are provided.

Fees

Costs are another important factor when comparing the top prop trading firms. Often there is a fee to participate in the online evaluation. This can be anywhere in the region of £100 to £500 and there is no guarantee of funding. Tip: look for assessments with free retakes.

Some prop trading companies also require a membership fee once a live profile is achieved. These costs are often used to cover market data access, trading platform hosting, and access to educational resources.

Markets & Tools

As the main tool to analyse charts and execute trades, the choice of platform is important. Some proprietary trading firms will host their operations on a partner broker’s proprietary software. Look out for access to technical indicators, custom graphs, and analysis tools.

You may want to consider a prop trading firm that offers access to a remote platform you have used before such as MetaTrader 4 or MetaTrader 5. Mobile app compatibility may also be important to you if you are planning on trading while on the go.

Prop trading firms often specialise in different assets, whether that’s forex,cryptocurrency, equities, or energy. Make sure that your favoured assets or direct instruments are available during operating hours.

Withdrawals

Proprietary trading firms have different rules regarding withdrawals, and you may be restricted to set withdrawal dates or minimum requirements before any profits can be withdrawn.

City Traders Imperium, for example, offers weekly payouts. Audacity Capital, on the other hand, permits withdrawal requests only once a 10% profit target has been met.

Additional Services

There are a few additional services or features that can set a prop trading firm apart from the competition:

Education

Educational resources and content used alongside trading can be an excellent way for traders of all levels to develop. Some prop trading firms offer this content in a variety of formats such as videos, articles, and blog posts.

A community forum may also provide education in the form of idea sharing and strategy insights from more experienced traders.

Courses

Alongside the standard online resources, some companies offer in-person or online courses, webinars, and tutorials, usually for an additional fee. Besides typical video-based self-study courses, the stand-out options include unique dealing-desk training and personalised sessions.

Audacity Capital, for example, offers an Introduction to Trading course for £649. This is a two-day intensive program for UK traders to visit the firm’s office in London, where they will be taught the basics of investing, managing emotions, and risk management techniques.

Customer Support

Access to a responsive customer support team can be important for withdrawal issues, uncertainty of assessment criteria, or if you have questions about trading conditions.

Live chat or phone hotline are often the most responsive forms of communication. It is worth testing these out before signing up for the evaluation.

Pros Of Prop Trading

• Reduced Risk – As you are trading with company funds, none of your personal capital is at risk when trading. With that said, many prop firms will protect their funds against significant losses with automated drawdown stops.
• Increased Profit Potential – Access to a proprietary trading firm’s capital often means an increase in purchasing power beyond what is accessible through personal funding alone. Opening and closing significant-sized positions ultimately increase the chances of larger profits. Some of the best prop firms offer funded profiles worth between £50,000 and £4,000,000.
• Mentorship – Since prop trading firms put their capital on the line, many provide bespoke training and support to their traders. You can benefit from a personalised training program and one-to-one coaching.

Cons Of Prop Trading

• Long Evaluation Processes – Some prop trading firms implement challenging and sometimes time-consuming assessment criteria for retail investors to be accepted. This is typically more than a one-step program so be prepared to spend a lot of time in the demo profile.
• Profit Splits – Sharing profits with a proprietary trading firm can make a large dent in your hard-earned income. Some companies take up to 50% of the returns which is huge vs trading with standard UK brokers. Consider whether you need access to funding before signing up.
• Upfront Fees – There are usually fees involved before capital is provided. You may be required to pay to participate in the online evaluation process, with no guarantee of a live account at the end of it. Look out for brokers without an additional membership fee. Additionally, courses and webinars may be provided with a one-off fee.

Regulation Explained

Unlike some investment banks or hedge fund groups, prop trading firms in the UK do not need to be regulated and are not banned.

Having said that, if your chosen organisation uses a partner broker, you should check their regulatory status before signing up. Look out for a license from the Financial Conduct Authority (FCA) for peace of mind.

Prop Trading Vs Hedge Funds

A hedge fund uses pooled funds to generate returns for its investors. Typically, these investments are not executed by retail traders and are managed by professional traders. They are often referred to as quant traders, meaning a specialised investor that applies mathematical and quantitative methods to evaluate financial products or markets.

Importantly, hedge funds use customers’ money to invest in financial markets. The difference is that, hedge funds, as opposed to prop traders, are accountable to their clients. In contrast, proprietary trading involves retail investors trading a firm’s capital on their behalf.

Bottom Line On Prop Trading

Proprietary trading in the UK is becoming increasingly popular. It offers the chance for skilled retail investors to generate sustainable profits using the capital and services of a prop trading firm. Some providers also have no capital contribution.

There are many factors to consider when comparing proprietary trading companies. Use our guide above to help you determine which firm is best. Alternatively, choose from our list of the top-ranked prop trading firms.

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