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.

Table of Contents

  • How to Start a Prop Firm Step By Step
  • 1. Gain Knowledge and Trading Experience
  • 2. Create a Business Plan
  • 3. Legally Register the Company
  • 4. Raise Capital
  • 5. Implement Robust Trading Technology
  • 6. Establish Risk Management and Compliance Protocols
  • 7. Recruit Traders
  • 8. Monitor and Improve Business Performance
  • Understanding Cost Structure and Revenue Streams
  • Cost Structure
  • Revenue Streams
  • Start Your Prop Firm With PropTradeTech
  • Can You Find Success in Prop Trading?
  • Frequently Asked Questions

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

Q

Can I start a prop trading firm?

A

If you have ample funding sources, strong trading experience and a clear vision for success, then you can.

Q

How much does it cost to start a prop trading firm?

A

Depending on your goals and scale of service, starting a prop trading firm can cost as little as $10,000 or as much as $1 million.

Q

Are prop trading firms profitable?

A

They can be. With the right trading talent, liquidity, budget and decision-making, a prop firm can turn a profit. It will require a lot of dedicated work and attention, though.

How to Start a Prop Trading Firm (2024)

FAQs

Can I start my own prop trading firm? ›

Do proprietary trading firms need a license? Prop trading firms are less heavily regulated than regular brokerages and broker-dealers. However, it depends on the way the prof firm choose to open their business. If them choose to open a firm only with trader challenges, there's no license needed.

How much money to start a prop trading firm? ›

To summarize, the amount of money you need to open a prop firm can range from $10,000 to $1 million, depending on the type of prop firm, the technology, the registration, the liquidity, and the CRM tool.

Are prop trading firms profitable? ›

While prop trading is one of the most profitable opportunities, it is affected by asymmetric risk. This means that the profit-sharing ratio may be from 75% to 90%, but you bear 100% of the risk of your trades. When becoming a prop trader, you often need to deposit an amount of money known as your risk contribution.

What is the starting salary for prop trading? ›

As of Apr 23, 2024, the average annual pay for an Entry Level Proprietary Trader in the United States is $112,369 a year.

Do prop firms really pay? ›

Yes, prop firms do pay. While there are some scams out there popping up everyday, reputable prop trading firms like True Forex Funds, FTMO,5%ers,FundedNext are legitimate and pay traders according to their profit-sharing agreements. As for True Forex Funds, I can vouch for their credibility.

Can you make a living with prop trading? ›

Also known as “prop trading,” it offers higher earnings potential much earlier in your career than jobs like investment banking or private equity. It's arguably the most merit-based industry within finance: if you make millions of dollars for your firm, you'll earn some percentage of it.

How many traders fail prop firms? ›

According to it, 4% of traders, on average, pass prop firm challenges. But only 1% of traders kept their funded accounts for a reasonable amount of time. While this result is not nearly as bad as the one discussed earlier, it still looks bleak for prospective prop traders.

Is Prop firm worth it? ›

Prop firms are an excellent source of accessing further capital to increase profit potential. Passing a prop firm's evaluation means reaching a profit target while staying within its risk management rules. Prop firms require traders to use their brokers, which can be positive or negative depending on the broker.

Is it hard to become a prop trader? ›

To become a proprietary trader, earn a bachelor's degree in finance, business, or mathematics. Complete at least one internship with a trading firm to learn about the finance industry and make professional connections. Apply for an entry-level proprietary trader role.

What are the negatives of prop firms? ›

Foreign Exchange Specialist at FTMO.
  • Strict Risk Management Rules and Trading Guidelines: ...
  • Profit Sharing: ...
  • Profit Targets During the Evaluation Period: ...
  • Limited Control Over Capital and Payouts: ...
  • Lack of Regulatory Oversight: ...
  • High Leverage and Margin Requirements: ...
  • Financial Risk and Capital Exposure:
Feb 11, 2024

How stressful is prop trading? ›

Prop trading can be highly stressful due to the fast-paced nature of markets and the pressure to make split-second decisions. Working in the financial markets as a prop trader comes with a series of demanding hurdles. Such traders face an environment filled with: Intense rivalry.

Is prop trading risky? ›

There are three types of accounts: Pro Accounts, Aggressive Accounts, and Micro Accounts. You can open an account with funding of $10,000, all the way up to an account worth $1 million. Proprietary trading is a great way to start trading without much capital, but there is a considerable risk of losing money.

Do you need a license to prop trade? ›

Do proprietary trading firms need a license? Prop trading firms are less heavily regulated than regular brokerages and broker-dealers. However, if such laws apply, you must still properly register your business and get licensed.

Do prop firm traders pay tax? ›

You need to deduct sales tax of 23% first if you are self employed as you do when trading on a prop firm. On top of that you pay taxes as individual or company. Of course if you only make 20k per year it is not much. But if you do 100k or 200k per year as serious income from prop firms then it looks different.

Can prop traders work from home? ›

You can get a remote job as a proprietary trader with a background in finance, economics, mathematics, or business. The minimum qualifications typically include trading or investing experience, but many employers are willing to train proprietary traders with very little experience.

Is prop trading allowed in the US? ›

Institutions such as brokerage firms, investment banks, and hedge funds frequently have proprietary trading desks. However, there are restrictions against large banks engaging in prop trading, designed to limit the speculative investments that contributed the 2007-2008 financial crisis.

Can I start my own trading company? ›

You can establish your stock trading business as Limited Liability Partnership, Private Company or a Partnership Firm, or partnership firm. Before you learn how to start a share trading business, take the time to consider all options and determine an appropriate structure.

References

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