Starting a proprietary trading firm - what you need to know (2024)

If you are familiar with forex and CFD trading you may have heard about proprietary trading before. There are numerous companies on the market that operate around the world and have hundreds of thousands of clients in over 100 countries.

You may be wondering just how difficult it is to set up your own prop firm and enter the industry yourself, after all, prop trading can be a lucrative business, with some of the most successful firms making millions of dollars in annual profits.

However, much like any other business, starting out with no prior experience can seem daunting. You may have some experience trading with a prop firm, but starting and running one can introduce a lot of complexities that come with startups.

Having a clear vision of what to expect and how to go about your business step by step can go a long way in determining your success.

Guides like these can help you get a clearer vision of what steps you need to take and the risks you should be aware of in order to establish a lasting and successful proprietary trading company.

Become an experienced prop trader

To increase your chances of success, it is important to accumulate insider knowledge regarding how prop trading firms operate and where you can provide added value to your clients.

For this, you will need to be an experienced proprietary trader yourself. Chances are, the idea of starting your own prop firm came from your experience with an already established prop firm.

Make sure to carefully analyze the strengths and weaknesses of the prop firm you worked with and identify where the potential for improvement lies.

Otherwise, if you establish a proprietary trading firm that offers nothing new, your clients will soon catch on and move on to other platforms that they deem to be more innovative and beneficial for their financial objectives.

When trading with your prop firm, make sure to take note of some of the key aspects of how the company operates and how satisfied you are as a client. Some key points to focus on could be:

The fairness of the trading challenges and number of evaluation stages
How profit withdrawals are handled and how soon you can access your funds
What instruments are available to trade and which platforms can you use

Highlighting the shortcomings of other prop trading firms can give you a clearer picture of what to consider when setting up your own firm and gain a competitive advantage.

Create a business plan for your prop firm

Any new company requires a business plan. Therefore, it is imperative to have a well thought out business plan before you move on to the practical aspects of setting up your new prop trading firm.

Some key questions your business plan needs to answer are the following:

How will the prop firm generate revenue? Will the account fees be charged once per evaluation or on a monthly basis?
What will the profit-sharing agreement be and how much of their profit will traders keep?
What other features will you incorporate to your prop firm?
Will you offer any educational materials, such as courses and webinars?
How will you ensure the security of client accounts?
How will you scale up your prop trading firm and what is your value proposition?
How will the business be incorporated? (LLC, JSC, etc)

Answering these important questions and more will allow you to have a coherent plan to follow, which you could also use to attract investors and grow your firm over time.

You can use one of many business plan templates available for free on the internet. Conversely, you could use the help of a professional advisory firm, which may cost you a considerable fee.

Gather the necessary startup capital

Depending on how successful our personal experience has been with prop trading, you may have accumulated seed capital for your proprietary trading firm. However, this may not be enough and you may require the help of angel investors to get the firm operational, without missing essential features upon release.

Get a white label for your prop firm

Building a prop firm for scratch is a time and resource intensive process that will require dedicated teams to manage all the moving parts.

For this reason, signing up to a white label service provider can help you quickly build the skeleton of your prop firm and better visualize the features you would like to incorporate.

White labels provide a range of software tools to help you set up the basic functionalities of your firm, upon which you can build more features and arrive at the finished product.

Numerous white labels provide their services at competitive prices with user-friendly designs and ample functionality. Make sure to review the terms and prices offered by multiple white labels to choose the best option with the most reasonable price.

TradeLocker

TradeLocker is a popular white label that provides solutions for brokerage and prop trading firms. The company assumes responsibility for the technical side of your white label solution, while you can focus on marketing and design choices.

TradeLocker promises its users to have a functional prop firm within a week of signing up on TradeLocker, as well as the opportunity to maintain an average 45% profit margin.

The TradeLocker website breaks the process of opening a prop firm down into 8 steps:

Learn how to trade and master the market dynamics
Make consistent profitable trades and prove that you have an effective strategy
Teach others how to trade and build your audience
Become an affiliate and partner with established brokerages and prop firms
Start you own prop firm and fund superstar traders
Launch a brokerage and start offering your services to a wider audience
Become a mentor and help others launch their own companies
Become a tech provider for brokerages and prop firms

Over the course of its operational history, TradeLocker has onboarded over 75 prop trading firms, which makes it a reliable partner for those looking to enter and disrupt the market.

Register your firm

The next step is to register your proprietary trading firm. Since there are no specific licensing and regulatory requirements for prop trading firms, other than basic KYC policies, you can simply register it as you would any other business.

Prop trading firms are typically formed under LLC-s and do not have many partners and owners.

Forming a joint-stock company is also not necessary, as it does not add much to the business unless you are planning to take the company public in the distant future. It must be noted that none of the prop trading firms that are active on the global market today are public companies and are all privately held by co-founders and other early investors.

Once you have registered your company and got all the necessary documentation in place, you can safely start building the core features and progressing on your journey as the founder of a proprietary trading firm.

While the current licensing and regulatory climate around prop trading firms is generally pretty lax, this may not always be the case in the future. It is important to keep track of any and every relevant regulatory update that could affect the registration process of proprietary trading firms in order to avoid any surprises down the line.

Come up with trading challenges and fees

Trading challenges are the cornerstone of any prop trading business and you should carefully consider how to structure challenges for clients and how much funding to allocate to each funding level.

Typically, challenges are divided into 2 or 3 stages, with the initial stages being “trials” for the client to complete and prove that they can structure their trading strategies in compliance with the limitations and requirements set by the firm. These are the challenge terms that you will have to come up with and they should strike a balance between enticing and fair.

Some key questions to ask in the process may be:

What is the profit target for clients on each stage of the challenge?
What is the maximum drawdown for their trades until the account gets revoked?
Will the challenges charge one-time fees or monthly fees and how much will each of them cost?
What instruments and how many asset classes will you be offering?
Will there be any minimum trade requirements?

You can easily narrow down your search for the right terms by looking through a variety of trading challenges offered by other successful proprietary trading firms on the market and deciding where they have an advantage and where they fall short.

Hire employees with relevant qualifications

As your prop trading firm is taking the first steps on the market, you will more than likely require the assistance of a few professionals, such as experienced traders and programmers, as well as a marketing assistant to plan out your outreach strategy.

Depending on your starting capital, hiring experienced professionals may not be an issue, or it might be a significant cost.

Nonetheless, having professionals on your team can help you get a clearer picture of how the company is developing and will allow you to do so in a more efficient manner.

Finding someone with experience working at a prop trading firm can be a great asset, as they will be aware of the specifications of how these firms operate and can seamlessly be onboarded into your team.

In the initial stages of the business you may not require a large team to manage the establishment and growth of your business, which allows you to be more cost-effective with a relatively small but competent team of day-traders and programmers.

Decide how to market your business

Developing a coherent marketing strategy can be half the work when getting the word out about your new business.

If you are using a white label, you are likely to have more free time to focus on marketing and there are a few different approaches you can take:

Use a traditional route and pay for advertisem*nts and invest heavily in SEO and boosts
Hire already established influencers as brand ambassadors and use their social media channels to reach new prospective clients
Outsource to a social media marketing agency

Regardless of which route you choose, marketing will be a significant part of your costs, especially during the early stages of your business. It is important to have sufficient funds to reach your audience, otherwise your initial investment will not bear much fruit in terms of onboarding and generated revenues.

A key component of your marketing strategy should be a well-designed website that is easy to navigate and user-friendly. First impressions can go a long way for potential customers when deciding if your firm is worth a try or not. White labels can help you tremendously here, as they are well aware of these factors and will offer plenty of customizable design choices for your prop trading website.

Find investors and get funding to grow

Once your proprietary trading firm has been well-established and you have a couple hundred loyal clients, you can start looking for angel investors to fund your growth and increase your global reach.

You can do this by evaluating the growth trajectory and speed of your firm and setting annual revenue growth targets.

Alternatively, you can hire a professional consultancy firm that will conduct a full valuation of your business, its book value, cash flows, revenue growth, etc, and arrive at a number that represents the current value of your business, as well as some of its growth potential priced in.

You can pitch your business to local angel investors and offer either an equity stake, or a revenue sharing agreement to them.

You could also take the more traditional route of debt financing from a bank. However, adding debt to your books at an early stage in the business is not advisable.

The best case scenario is finding an investor with experience in the prop trading business, which will make it easier to communicate your plans and explain your business model to them.

Pros and cons of starting a prop trading firm

As with any business venture, starting a prop trading firm can come with its challenges and benefits and it is important to properly weigh up the risks and rewards to decide whether this is the right course of action for your financial goals and expectations.

Pros

Independence – running your own business always leads to more independence and a clearer vision of what you want to do and the steps you may need to take to reach it. This sense of independence is what most new entrepreneurs strive for
No licensing requirements – proprietary trading firms are known for very lax regulations and you are unlikely to stumble upon too much red tape when it comes to setting up your prop firm. As long as you have the necessary capital and structure to start, there are little barriers to entry
Social media marketing – when starting out with your prop firm, you can rely on social media marketing and affiliates to get the word across, which is less expensive than traditional marketing channels. You can also use the help of already established prop trading professionals an influencers and market your service through them
Growing market – the proprietary trading market is a growing one with plenty of new potential customers hearing about what proprietary trading is and how they can make money from it. This gives you an opportunity to become a part of a growing industry

Cons

Capital requirements – proprietary trading firms require plenty of capital when starting out. The more starting capital you have, the better terms you can offer your clients.
Stress – running your own business can be stressful, especially during the early stages, as you are the one solely responsible for its success, which can be mentally draining and having checks and balances at hand to manage processes effectively are essential
No guarantees – when starting a new prop trading firm, there are no guarantees that the business will be successful and a lot of things can go wrong. For example, your trading challenges may fail to attract as many traders as you would have hoped for, which can be detrimental to the overall success of the prop firm
A lot of competition – the prop trading market is growing at a rapid pace and the lack of regulations means that every major international firm is your competitor, which can limit your growth opportunities

Conclusion

Setting up your own proprietary trading firm can be a challenging, but rewarding experience at the same time.

While most startups fail and there is a lot of risk involved with starting a company from scratch, a few key factors can go in your favor in the prop trading market, such as:

A new market with very little regulation and a lot of room for growth
White labels that offer technical solutions to get the hard part out of the way
Established prop trading influencers to help kickstart your marketing campaign

As long as you have sufficient startup capital and potential backers to help the company grow, there are not a lot of obstacles in your way to bar you from entering the market.

The most important part of a successful proprietary trading firm is the attractiveness of the trading challenges and their fees.

Onboarding the first dozen clients can be the most challenging part of a prop trading business and once you can consistently onboard hundreds, your prop firm is well and truly ready to take on the big stage.

FAQ on how to start your proprietary trading firm

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