If you are reading this article, chances are you are either planning to start a prop trading firm or seeking ways to boost your company’s bottom line.
While in our earlier blog, we discussed the top 5 technologies needed to start a prop firm, this one focuses on the latter, listing the top ways prop trading solutions help drive business growth.
What Are Prop Firms?
Prop firms, also known as proprietary trading firms or trader-funded firms (TFFs), deal with prop trading. Prop trading is the shortened term for ‘proprietary trading,’ which is when a firm trades on financial markets to make a profit using its own money.
Prop firms essentially grant prospective traders trading accounts, known as prop funds, so that they may trade and make profits with this principal provided by the firm. The capital amount can go up tens of thousands, hundreds of thousands, or even millions of dollars. Of course, in return for the capital, traders typically share a percentage of their profit with the prop firm.
How Do Prop Firms Operate?
Prop firms are businesses that hire professional traders to trade their own money. Such companies utilize prop trading challenges to test traders’ skills. These challenges may include hitting specific profit targets, adhering to maximum loss limits, or achieving a certain level of net income. Only after passing the evaluation process will traders have access to the firm’s money.
When a trader fails, in most instances, they are allowed to retry. Most of the time, prop firms use specialized prop trading solutions to conduct evaluations to ensure that only the best traders are selected. The demand for these specialized tools and automation, along with the expanding use of quantitative trading tactics, has resulted in a massive interest in the prop trading industry, which is expected to grow at a CAGR of 4.2% between 2021 and 2028.
So, what are prop trading solutions?
What Are Prop Trading Solutions?
Prop trading solutions are platforms that facilitate proprietary trading. These solutions provide various tools and functionalities, such as unlimited challenges, risk management features, analytics, and intuitive dashboards, that prop firms can use to run their trading operations more efficiently.
How Do Prop Trading Solutions Drive Business Growth?
Prop trading solutions can significantly boost a TFF’s business by attracting elite traders, expanding income streams, and providing advanced risk management tools. By leveraging these solutions, companies can offer a more competitive and attractive trading environment, ultimately driving business growth.
1. Diversifying Revenue Streams
Prop trading is one of the strongest ways to diversify revenue streams. Instead of income from commissions and fees on client trades, TFFs can gain from trading on their own account. This means that each successful trade will result in an increase in their bottom line.
Additionally, several TFFs charge entry fees for trading challenges. These are not merely a test of skill but an annuity stream, particularly when traders must retry. So, prop trading does not open only one new revenue stream but several.
2. Attracting Top Talent
The allure of prop trading opportunities can potentially attract some of the best traders to a TFF. Skilled traders are always looking for companies that offer high capital and modern trading tools.
By offering these, prop firms can become the best place to work, enhance their reputation among those in this industry, and put the best brains on board. The best traders bring in their expertise, which can be useful in boosting the company’s performance.
3. Better Risk Management
Risk control is an important aspect of trading and a prominent feature of prop trading software. Most leading software solutions, like Prop Pulse, come loaded with advanced tools and dashboards that help TFFs make informed decisions.
Hence, a prop firm can benefit from strategically sound trades that reduce potential losses. With resources and technology, a prop trader is better placed to safely navigate complex markets, protecting the firm and increasing the chances of successful trades.
4. Through Advanced Technology
Proprietary trading greatly relies on cutting-edge technology: advanced trading platforms, real-time analysis, algorithmic trading, and comprehensive back-office management. Integrating these technologies can make broad liquidity pools and deep market insights easily accessible.
For instance, Prop Pulse integrates with all operating techstack of a broker, including trading platforms, a liquidity management solution, PSPs, and a CRM system. With such transparent integrations TFFs can have seamless data flow between systems and make informed and profitable decisions to enhance efficiency and effectiveness in the marketplace.
5. Less Regulatory Burden
Another significant advantage of prop trading is that the regulatory compliance burden is much lighter than that of traditional brokerage firms. Of course, basic safety measures like AML and KYC must be followed, but otherwise, the overall regulatory landscape for prop trading is less stringent. More specifically, prop trading firms are governed by generic laws such as consumer protection rules, data protection regulations, and international sanctions conditions.
The lax regulations mean TFFs can start a business and fully function sooner. This gives them more time to focus on trade and perform other business activities rather than trying to wade through complex regulatory requirements.
The Bottom Line
Prop trading solutions are no longer nice to have, they are the future. For anyone looking to invest in prop trading, betting on this technology seems like a no-brainer. Prop trading firms who choose to do so are not just adapting to change; they’re leading it.
Up next, we discuss how brokerages can use prop trading technology to evaluate money managers and signal providers.
