The prop trading industry is relatively new, yet it is growing rapidly. In 2020, its global market size was estimated to be around $6.7 billion and predicted to grow at a compound annual growth rate of 4.2% between 2021 and 2028.
This demand is largely driven by prop trading solutions that Trader-Funded Firms (TFFs) use to identify and recruit top traders. But here’s the thing: this powerful tool isn’t exclusive to TFFs. Brokers can use them, too, to evaluate money managers and signal providers.
So, if you haven’t thought about this before, get ready for some food for thought. In this article, we’ll look at different ways brokers can use prop trading solutions.
But first, let’s go back to basics—what are prop firms?
What Are Prop Firms in Forex?
Proprietary trading firms, or prop firms, provide traders an opportunity to trade with the firm’s funds in exchange for a percentage of their profits. This gives traders more capital to increase their trading positions and take on more risk.
Plus, these firms often provide access to advanced trading tools, software, and resources, which otherwise a trader won’t have. To join a prop firm, a trader typically needs to prove their trading skills. This is often done through a “Prop Firm Challenge.”
What Are Prop Firm Challenges?
A prop firm challenge is a program offered by prop firms to test the trading skills of aspiring traders before they can manage the firm’s capital. If you are wondering how does prop trading work, here’s a generic overview:
The trader pays a fee to register for the challenge and gets access to a simulated or real trading account with a set amount of capital. The challenge usually lasts 30 or 60 days.
The trader must meet the firm’s objectives, such as a minimum profit target while staying within a maximum daily drawdown. The TFF then evaluates the trader’s performance based on how well the trader meets the objectives and follows the rules.
If the trader successfully completes the challenge, they get a funded account with the prop firm, can start trading, and keep a percentage of the profits. If the trader fails the challenge, they usually lose the registration fee and have to re-apply. Some firms may allow them to re-try the challenge after a waiting period or offer additional training and resources to help them improve.
Prop Trading Solutions for Brokerages
Guided Customer Journey
A few months ago, Axi Select’s Greg Rubin made a compelling remark about prop trading challenges and how prop trading works. He called the “Demo trading model” unsustainable.
Rubin said that TFFs depend excessively on registration fees and believes that this approach limits the opportunities for skilled traders who fail the challenge—they either have to reattempt the challenge or go back to generic educational courses.
One could also argue that between these two extremes lies a gray area for brokers—a chance to craft a guided customer journey for such traders. Instead of selling challenges to unsuccessful traders, brokers can onboard them as regular clients with some deposits.
They can also provide traders opportunities to follow successful signal managers through social trading and copy trading services. This approach compensates for the lack of deep financial expertise that TFFs often have and creates a sustainable, trader-focused environment. By retaining these traders as customers, brokers can educate them, help develop their skills, and ensure fair profit-sharing arrangements.
By offering this tailored customer journey, brokers unlock a symbiotic partnership with these aspiring traders. It goes beyond the short-term focus of challenges; it’s long-term growth and mutual success. Therefore, it’s no surprise that major players in the prop trading industry, like FTMO, are entering the retail brokerage space.
Evaluate Money Managers and Signal Providers
Beyond empowering aspiring traders, prop trading solutions also allow brokers to evaluate money managers and signal providers.
For example, Brokeree’s Prop Pulse can be used by brokers to create various challenges for money managers and signal providers. Brokers can test them on the following:
Skill: The challenge phases, especially the evaluation phase, mimic real trading conditions with goals and limitations. Money managers and signal providers must pass the challenges to prove their trading skills and decision-making.
Risk Management: The challenges can be set to test risk tolerance and risk management. The limitations in the challenges can limit drawdown or excessive leverage and show how the money manager or signal provider handles risk.
Strategy: By requiring to achieve specific goals, the challenges can reveal the underlying strategy used by the money manager or signal provider. Brokers can then assess the strategy for their clients.
By offering various challenges, brokers can attract traders with different trading strategies and risk appetites. They can test each strategy’s profitability and risk and then make informed decisions about which money managers and signal providers to work with and ultimately create a more robust and profitable business.
Implement Automated Risk Management
Prop trading solutions like Brokeree’s Prop Pulse go beyond simply evaluating the risk strategies of money managers and signal providers. They also act as a powerful risk management tool.
Brokers can set predefined limits on factors like drawdown, leverage, and position size, ensuring money managers trade within a controlled framework. Real-time monitoring and automated alerts allow brokers to intervene quickly if limits are hit.
This empowers brokers to prevent potential losses, knowing money managers are trading responsibly with both the broker’s capital and their clients’ investments in mind.
Parting Thoughts
Prop trading solutions offer brokers a game-changing opportunity. By using these solutions, brokers can create a more sustainable trader-focused environment. They can onboard traders who didn’t make it in challenges and offer them real opportunities through social trading and continuous education and development. With solutions like Brokeree’s Prop Pulse, brokers can not only evaluate money managers but also enforce strict risk management and protect their capital and their client’s investments.
As for TFFs, will they follow FTMO and move beyond traditional prop firm account management services? Only time will tell. The future of prop trading is exciting and a bit uncertain, and both brokers and TFFs have the potential to benefit from this evolution.
