How to Start a Prop Trading Firm
Abundance of trading strategies provides tens thousands options for making money. A practical and analytical format of profit making is prop-trading, the essence of which is investing the company's own funds in various assets, cryptocurrency and projects. The role of personnel is performed by the participants of the prop-company - brokers and traders, who receive from 10 to 50% of net profit. Such a platform can be developed, rented or unified using White Label solutions. For more information on starting a business, the amount of start-up capital, the selection of participants for the realization of a financial and economic start-up, and examples of how analogues work, see Merehead's material.
| Indicators | Growth dynamics of the real estate prop-trading sector until 2028 | ||||||||
| Year | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 |
| Amount of prop trading, $ billion | 6,7 | 6,98 | 7,27 | 7,58 | 7,90 | 8,23 | 8,58 | 8,94 | 9,31 |
Prop trading solutions depend on profitability model type. Monetization includes revenues from participant fees, commissions from trader profits, asset allocation to growing or existing markets. Successful solutions are the basis for trading strategy templates, hundreds of diversification scenarios. Leads for expanding prop-investments can be experienced traders, whose work on the platform attracts beginners. Having proprietary funds of a prop firm simplifies keeping financial and accounting records, reduces the costs of payment gateways and processors, compensation of attracted assets and insurance. That is why potential participants are interested in this sector.
| Indicators | $50ths.* | $100ths. | $200ths. | $300ths. | $600 ths. |
| Rent / development, ths. $ | 10 | 20 | 40 | 60 | 120 |
| Marketing, ths. $ | 10 | 20 | 40 | 60 | 120 |
| Personnel, ths. $ | 10 | 20 | 40 | 60 | 120 |
| Payment for IT infrastructure operation, $ ths. | 2,5 | 5 | 10 | 15 | 30 |
| Taxes, ths. $ | 5 | 10 | 20 | 30 | 60 |
| Startup and deployment costs, ths. $ | 2,5 | 5 | 10 | 15 | 30 |
| Unforeseen/other costs | 10 | 20 | 40 | 60 | 120 |
| Total | 50 | 100 | 200 | 300 | 600 |
* provided the lease, in other options - development and startup
Payment gateways, chatbots, integrate AI and templates with customization, setting up CRM and maintaining accurate order execution requires additional investments. The technology stack for stabilization and clarity of executed transactions is most often customized by integrating investor-friendly payment systems and gateways, transaction copying protocols, KYC verification with a choice of reliable hosting to ensure data and bases are preserved. It attracts liquidity providers in the long run, expands the number of securities, generates narrow spreads and low withdrawal fees.
Prop traders using their own money to invest move away from leverage by choosing the most profitable positions to trade - real estate and parcels of land, a liquid commodity (gold and oil, energy and grains) or technology. Trading rules must comply with SEC and CFTC requirements, satisfying both financial management and fiscal strategy standards. Performance measures include target profit margins ranging from 7% to 12%, loss limits of 2% to 5% per day, and capital loss limits of up to 12% - 15%.
In order to select the right team of participants in prop trading, a two-stage test should be developed and after selecting the best ones, their performance should be monitored. Leaders can be rewarded at the rate of 70-80% of net profit, less successful traders can be limited by a threshold of 30-50%. Showing the leaders in the chart of traders (in encrypted or open format) will allow you to assess the success of the team's actions quickly. These indicators are hidden behind a certain icon on the admin panel, in the investor cabinets in CRM or on the trading desk. Financial level growth - balance between liquidity, risks in trading or investing and profit distribution.
| Indicators of a successful trader | The beginning | End | Difference | Per unit (at 400 positions) | For the month |
| Scalping (3 deals/day) | 200 | 220 | 20 | 0,05 | 1800 |
| Day trading | 2000 | 2100 | 100 | 0,25 | 3000 |
| Positional (for the week) | 10000 | 12000 | 2000 | 5 | 8571,43 |
| Swing trade (decade) | 15000 | 18000 | 3000 | 7,5 | 9000 |
| Total: | 27200 | 32320 | 5120 | 12,8 | 22371,43 |
Suppose that all trades are successful and with 90 closed scalping orders, 30 on daily positions, 4.3 on position orders for the week and 3 on swing trading he will get a total profit of $22.371 thousand. If the assumptions about trends are wrong, the losses will reach 10-20% and higher, depending on the type and maturity of trades.
| Indicators | The beginning | The end | Difference | Per unit (for 400 items) | For the month |
| Scalping | 200 | 220 | 20 | 0,05 | 1800 |
| Day trading | 2000 | 2050 | 50 | 0,125 | 1500 |
| Positionals for the week | 10000 | 11000 | 1000 | 2,5 | 4285,71 |
| Swing trade (decade) | 15000 | 17000 | 2000 | 5 | 6000 |
| Total: | 27200 | 30270 | 3070 | 7,675 | 13585,71 |
It can be seen that the trader's income decreased by 39.27% in case of erroneous calculation of medium- and long-term trends and amounted to $13.59 thousand instead of $22.37 thousand. Therefore, a forecasting error for long positions invariably costs more losses than for short positions. If returns exceed the S&P500 benchmark level, the trader moves into category α as an active investor. Passive investing is benchmarked against the Dow Jones index and broad-based stock markets. But for a prop firm, the best option is to find an undervalued commodity or company that will provide long term, reliable returns or to make investments in growth potential.
Proceeding from these core traditional and newly created but promising indices, prop-company owners can order customization of forming their own traders' molds based on Asia-Pacific, U.S. and Europe, North Africa, the Middle East and other key trading and production local and global areas. Taking up an aggressive way of doing business is sometimes more beneficial than a measured balancing act. Sailors on sailboats used to say that you can get away from a storm by flying under all sails in the foredeck at maximum sail than by leading in the beam and furling the sails. The same applies to prop trading.
Therefore, it is necessary to combine the “five whales” - stocks and futures, indices and commodities, and crypto-assets. For example, an unexpected catalyst of events in Syria may result in an explosive growth in the share price of gas transportation companies in Turkey, and Israel's protectorate over a large part of the country - in the prospects for the development of trading business in the controlled regions. Stochastic oscillators within ±0.67σ of 50 units, working with MACD and RSI paired in such situations will most accurately forecast the situation in the stock and financial markets ahead of time.
MyFundedFutures has a similar functionality, which sets the task for traders to earn $6-8 ths. per month with a stop loss within $3-3.5 ths. For experts and leaders there are no requirements for scaling, fulfillment of sequence rules, but there must be a zero loss limit and a limit of 6-10 contracts. Virtual Training For Traders is an opportunity to learn how to manage finances up to $300k using platforms like DXtrade to buy and sell energy, rare earth metals and other raw materials, holding tournaments among participants. Once you've built up your hand here, you can go to FXIFY and, once you've achieved a 90% profit margin, scale up to $4 million in assets to receive instant payouts, tech analytics, and promising ideas.
Commission-free trading, leverage customization, automated functions and advanced trading dashboard with drawdown estimation and forecasting, convenient trading hours and diversification of trader's portfolio are the chips that attract both investors and talented traders with analytical skills and quick reactions. Trade the Pool and 5%ers, Top One Trader and ThinkCapital are among the well-known pro-trading platforms with different types of specialization trading types.
If we take the total income from closed orders as $50 ths., assume that the loss is not higher than $3 ths. and the IRR is equal to 35%, the lead broker will get $16.45 ths. of profit for the reporting period (standard 30 days). Therefore, in view of possible profits, lead traders whose trades are copied will be eager to use multiple analytical and forecasting tools to increase their income. An example would be Monte Carlo modeling, where the arithmetic mean and standard deviation of a sample are known. The minimum sample consists of 100 or more indicators, but the example shows a small sample of 25 items. Say the broker knows that the average rate of a stock or cryptocurrency, another lot for 30 days is $15.5, and the standard deviation is 2.7.
| Observation (course) number | Random number | Normal random variable | Comparison with initial parameters | |
| 1 | 0,96 | 20,281 | Average | 15,72 |
| 2 | 0,64 | 16,463 | Standard deviation (σ) | 2,777 |
| 3 | 0,02 | 10,156 | Initial parameters | |
| 4 | 0,12 | 12,375 | Average | 15,5 |
| 5 | 0,58 | 16,034 | Standard deviation (σ) | 2,7 |
| 6 | 0,57 | 15,988 | ||
| 7 | 0,17 | 12,976 | ||
| 8 | 0,75 | 17,315 | ||
| 9 | 0,81 | 17,901 | ||
| 10 | 0,35 | 14,487 | ||
| 11 | 0,37 | 14,598 | ||
| 12 | 0,11 | 12,119 | ||
| 13 | 0,49 | 15,421 | ||
| 14 | 0,79 | 17,632 | ||
| 15 | 0,46 | 15,249 | ||
| 16 | 0,82 | 17,947 | ||
| 17 | 0,08 | 11,774 | ||
| 18 | 0,60 | 16,204 | ||
| 19 | 0,62 | 16,333 | ||
| 20 | 0,58 | 16,058 | ||
| 21 | 0,99 | 21,482 | ||
| 22 | 0,30 | 14,096 | ||
| 23 | 0,24 | 13,604 | ||
| 24 | 0,97 | 20,751 | ||
| 25 | 0,54 | 15,757 | ||
The number of iterations is limited by the size of RAM and 1.048 million lines, where the necessary iterations on the rate of the interest asset can be recorded. But, nevertheless, the result will be the same as initially set: it will be close to the average and σ. This is how the distribution will look like at 25 iterations.
If the number is increased to 300 units, the histogram might look like this, with figures above $12 accounting for 265 cases. However, between $12 and $18 there are 214 cases or 71.33% of all iterations. Using monthly or quarterly data, a trader will estimate where the rate will move and use these parameters to calculate a stop loss or take profit. Although the choice will also depend on how the trends were changing in the overnight or daily format, and also how sharp the spikes were.
Increasing the volume of financial instruments used in proprietary trading changes the balance of portfolios, increases the speed of processed orders and API requests, so these nuances need to be taken into account by the owner and developers of the proprietary platform. DL growth in terms of 5 to 7 days with profit should be the factors that increase the rating of participants. The combined use of Pump and Dump techniques is the justification for the return of DL to the previous level. Therefore, acquisition of trading skills under specific achievements, flexible rewards, increasing liquidity under open orders form the development and building up of financial reserve.
In the process of capital accumulation, the prop company becomes a reputable market maker, building stocks, securities, cryptocurrencies with growth potential, which helps to generate profits when markets fall or illiquidity builds up. The autonomous operation of this sector can encourage or discourage client trading, but it requires evaluating the necessity of applying the Volcker Rule if short-term high-risk trading is likely.
Research and analysis of news resources controlled by influential prop companies often provoke exchange rate volatility, if it sharply differs from the forecasted one. Geographical diversification taking into account macroeconomic trends (countries' GDP, employment rate, price index) simplifies the selection of control points according to changes in stock trends in time intervals. There are many models of prop trading income: BID and ASK, commissions and generation productivity, scientific-theoretical and practical ideas and algorithms. The latter include trading real estate, fertile soils, and areas with proven rare earth metals.
Testing trading strategies is the backbone of a proprietary trading firm. Participant selection patterns, sufficient liquidity, reasonable revenue sharing mechanism and statistical-mathematical component of trading are the heart of the business. They, together with reliable and secure platform software, including UI/UX design, tuned cloud-server backend and CRM, determine the growth potential of the future company. Experienced developers and analysts are indispensable in these matters.
