How to Start a Prop Trading Firm (2024)

From hedge funds to private equity firms, the investment marketplace has room for all sorts of financial businesses and opportunities. One such model deals with high-stakes investments that can unlock streams of profits.

A proprietary trading firm trades common investment vehicles — stocks, bonds, derivatives and currencies — using its own capital. Prop trading firms are intensive companies staffed with experienced, dedicated traders who can generate profits from carefully timed trade executions.

This post explains how to start a prop trading firm for those willing to shoulder the risk.

How to Start a Prop Firm Step By Step

Here’s a general, step-by-step guide on how to start a prop trading firm. Even if certain individual components of these steps might not be relevant to your firm, the outline for this process is a good framework for setting up your business.

1. Gain Knowledge and Trading Experience

The prop firm business model takes a high-risk, high-volume approach defined by aggressive trading and leverage. Prospective prop traders need to be a little more educated in the field than other investment houses.

Traders with heavy experience in risk management, industry trends, dynamic strategies, regulatory compliance and business model construction are especially favored by prop firms. Those with strong stomachs and level-headed constitutions may be more at home at a prop trading firm.

2. Create a Business Plan

A prop trading firm business plan must lay out all the goals, marketing efforts, trading strategies and overall budget for courting success. It outlines the firm’s intended profit-sharing structure, risk management principles, trader evaluation and reasonable projects for trading success.

This step is crucial in setting a prop firm up for success. Be direct, upfront and reasonable about building a business plan — and take as much time as you need to get it right.

3. Legally Register the Company

Your prop trading firm, like any other business, needs to be registered according to local regulations. Once you’ve decided on your business structure (partnership, limited liability company, etc.), you’ll register your company with the secretary of state who oversees local businesses.

You’ll also want to get all the applicable licenses and permits. These may include registering with the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and the Commodity Futures Trading Commission (CFTC).

You may need other paperwork to register your company with state authorities and meet legal requirements.

4. Raise Capital

Your prop trading firm needs an influx of capital to launch operations. Capital funding helps cover operational expenses, regulatory requirements, potential business expansion and other financial needs.

Common funding options can include private investors, venture capitalists, banks and other financial institutions. You’ll want to have a solid business plan (see Step 2) to present to funding sources.

5. Implement Robust Trading Technology

Business technology evolves almost daily. Given the speed, volume and large amounts your prop trading firm should aspire to, you’ll need the latest available technology to stay ahead of market opportunities.

You’ll want to look into a white-label prop firm technology provider. This is an organization that’s specifically tailored to serve the prop trading community with cutting-edge trading software and tools. White-label providers typically offer solutions like trading platforms, risk-management software, data analytics and other trading instruments.

6. Establish Risk Management and Compliance Protocols

Because your prop trading firm will likely handle large amounts of investment capital, it’s important to institute a system that addresses risk and compliance protocols. These serve to build the right framework for robust trading strategies and risk management.

In addition to risk tolerance, your management strategy should cover capital allocations, leverage guidelines, stop-loss and take-profit orders, diversification, stress testing, contingency plans and other functions and tools specific to risk assessment.

7. Recruit Traders

Getting the right personnel is crucial to prop trading success. Your team should be as ready as possible to begin trading on Day One. After you’ve sketched out the kinds of leaders you want, find candidates through networking, referrals, business social media, recruitment agencies or headhunters.

At this stage, you should focus on giving potential traders attractive work packages with favorable terms. In addition to a robust salary, consider offering competitive profit splits, various funding options and access to the latest tech. When possible, use social media and professional networks to promote your firm and create a buzz around it.

8. Monitor and Improve Business Performance

Once business has started, you’ll want to set up systems and benchmarks to measure your prop trading firm’s progress. Consider what key performance indicators (KPIs) are most relevant to your internal team and investment partnerships.

Technology also comes into play with performance and business reviews. Integrate risk management tools, trade analysis and execution platforms, simulation software and backtesting to evaluate progress. Offer your team several opportunities for education and training to improve or accelerate their performance.

Understanding Cost Structure and Revenue Streams

With all the cash that’s likely to flow around your prop trading business, it’s good to get clarity on typical expenses and revenue sources for your firm.

Cost Structure

The most common expenses and fees for prop trading include:

• Brokerage and exchange fees
• Technology infrastructure
• Salaries and bonuses
• Payments to partners
• Risk management and analytics
• Regulatory compliance
• Market data and research tools
• Office rent and utilities
• Training expenses
• Legal, accounting and tax services
• Travel, insurance and administrative expenses

Include as many costs as you need or predict. It’s better to have cash set aside and not need it than scramble for emergency funds.

Revenue Streams

Prop trading firms generally make money from these sources and actions:

• Capital gains
• Interest and dividend income
• Performance fees related to trading strategy
• Commissions
• Licensing for proprietary trading tech
• Consulting and advisory services, if applicable

Always be on the lookout for new and novel sources of revenue.

Start Your Prop Firm With PropTradeTech

Prop traders need all the tools in their arsenals to drive toward success. They now have a forward-looking business solution focusing squarely on the prop trading industry.

PropTradeTech is a powerful software package that may be instrumental in learning how to start a prop trading firm and getting your firm off the ground. PropTradeTech provides a fully managed solution for your prop firm. It equips you with its proprietary platforms to manage your traders and ensure your long-term profitability.

PropFirmTech covers an array of functions built for prop traders. It features processes for launching and managing your firm from end to end. PropFirmTech includes a customer-friendly portal, design and marketing tools, risk management and analysis, helpful customer service and easy setup.

Contact PropTradeTech to find out more about its signature trading product.

Can You Find Success in Prop Trading?

It takes dedication, patience and superhuman financial skills to make money with a prop trading firm. With the right approach, strategies and personnel, prop trading can produce investment success at sky-high levels. Tread carefully but diligently on the prop trading landscape.

Frequently Asked Questions