To start a prop firm, you need to know the tech behind it. What makes it tick? This article lists five technologies you must have to launch a prop-trading firm.
What is Prop Trading?
Proprietary trading, or prop trading, occurs when a firm uses its own money, rather than clients’ funds, to trade a variety of financial products, aiming to profit from the trade. These companies are called prop-trading or trader-funded firms (TFFs).
How Does Prop Trading Work?
TFFs hire professional traders who use diverse strategies such as high-frequency trading, algorithmic trading, and more to achieve their profit goals in the market.
To become a trader with a TFF, individuals must pass a prop firm challenge, which tests their trading skills and reliability. A fee is usually required to take the challenge, and if the trader fails to qualify, they may be given additional study materials or required to retake the test.
5 Must-have Technology Solutions for Prop Trading Firms
Here are a few technologies you need to start a prop trading firm:
1. Trading Platform for Prop Firms
When we talk about prop firm brokerage tech, a few key parts matter. The trading platform stands out as the most crucial piece, as it serves as the primary interface for aspiring funded traders and those who have already secured funding. Some popular trading platforms include cTrader, MT4, and MT5.
The trading platform must support simulated market accounts for traders in the challenge phase and live market accounts for those who have qualified. Moreover, it should support multi-asset trading and be hosted in a network infrastructure with low-latency trading environments.
The trading platform should also have consistent and accurate data from market data feed providers. To do this, they need top-tier execution and reliable market conditions. This is where technology solutions like liquidity bridges or MT5 gateways come in. These execution engines can ensure consistent and reliable execution practices that can attract and retain skilled traders.
2. Prop Trading CRM
A CRM manages onboarding and payment processing. What sets a CRM designed specifically for financial services apart is its integrated Know Your Customer and Anti-Money Laundering features.
These CRMs also support a wide range of payment service providers, allowing firms to receive payments from any region worldwide. This specialized functionality ensures compliance and streamlines transactions in the financial industry.
3. Live Dashboards
A trader needs to gauge the health of their account accurately, whether they are trading in the live market or the challenge phases. To do this, they need a real-time view of their account health through a simple and intuitive client dashboard like the ones offered in Brokeree’s Prop Pulse solution, which has intuitive dashboards that highlight winning and unsuccessful accounts and several other information like passing a challenge, balance, account history, challenges purchased, and failed objectives
4. Risk Management Tools
Risk Management is a vital part of running a prop firm brokerage. There are many risks that can impact prop firm account management services.
TFFs need to protect themselves from losses and create a safe trading environment for their traders. For that, they must consider robust risk management settings in any prop trading solutions they choose.
For example, the risk of traders forgetting to set stop loss and take profit levels can be mitigated with automated risk management tools like Prop Pulse, allowing admins to set flexible thresholds to automatically close open positions and move the account into read-only mode. Similarly, overtrading is another risk that can be managed by setting trading limits and monitoring trading activity to detect any unusual patterns.
5. STP and Market Making
Another way TFFs can improve trade execution speed, reduce slippage, and earn extra revenue from the bid-ask spread by combining Straight Through Processing (STP) and Market Making.
Reverse hedging is one way to earn extra profits and revenue. This is where TFFs can take a position opposite a client’s trade to hedge against potential losses. But this should be used with caution as it can also increase the firm’s risk exposure.
To implement these strategies, a TFF needs a team of skilled people and in-house plugins and technologies such as Liquidity Bridge, which simultaneously connects several liquidity providers to the trading platform and offers different execution models. As a startup prop firm, the best way to begin is to go the STP route, which is simple and efficient. However, as TFFs grow and become more established, they can further explore market-making and reverse hedging to optimize their trading operations.
Final Thoughts
Launching a prop trading firm requires a mix of human expertise and tech. While the margins are high, building a sustainable prop firm requires infrastructure.
The tech above is a good start, but remember, they are just tools. Actual things only happen when those tools are wielded by skilled traders and a dedicated TFF team.
