Everything You Need to Know to Get into Prop Trading Firms
Explore the intricate world of proprietary trading, its history, and its role in crypto and traditional finance. Learn how it works, the benefits, and the challenges.
Proprietary trading, or prop trading, is a complex and often misunderstood aspect of the finance world. It refers to a situation in which a firm invests its own capital into third-party traders. These “proprietary traders” use the capital of the firm to make trades and are rewarded with a profit split.
Proprietary trading is becoming increasingly popular specifically among cryptocurrency and forex enthusiasts, who wish to expand their trading efforts but don't have the capital. This article will guide you through the fundamentals of proprietary trading, its history, its impact on traditional finance, cryptocurrencies, and the benefits and drawbacks associated with it.
TL;DR:
- In traditional finance proprietary trading refers to a model in which a financial company uses its own capital to generate profit on the market by investing or trading.
- Modern “Prop Trading” works by recruiting third-party traders to execute trades on behalf of the company (prop firm).
- Prop firms provide extensive capital for skilled traders to operate with and are rewarded with a profit split (80:20 - 90:10 in favor of the trader).
- Traders wishing to partner up with a prop firm usually have to complete a challenge to prove their profitability and consistency in markets.
What is Proprietary Trading?
In the general sense, proprietary trading is an investment strategy, in which a prop trading firm lends its own capital to third-party traders. This type of trading has various implications and restrictions based on the type of industry. For example, the crypto and Web3 segment is less regulated than traditional finance and allows more flexible conditions for both traders and prop firms.
Traders use this borrowed capital to facilitate whatever trades they wish, as long as they generate profits. The profits are split between traders and prop firms, making this a mutually beneficial relationship - traders who do not have enough capital at their disposal are given the opportunity to prove themselves as successful traders, while firms get a share of the profits.
The degree to which profits are split between trader and firm again varies among different industries. Traders usually get a higher share of the profits in crypto (as much as 90%) rather than in traditional finance.
Brief History
Proprietary Trading in Traditional Finance
Proprietary trading accrued significant attention during the 20th century as financial markets evolved and investment banks sought to capitalize on the opportunities the markets provided. Banks formed proprietary trading desks where skilled traders used the bank's own funds to trade and try to outperform the market.
The landscape shifted dramatically after the 2008 financial crisis. In response to the crisis, the United States enacted the Dodd-Frank Act in 2010. A critical part of this legislation was the Volcker Rule, which placed significant restrictions on the proprietary trading activities of banks, essentially preventing them from making risky bets with their own funds. This led many banks to shut down their proprietary trading desks.
The Current Outlook
In the modern age, a fair share of proprietary trading was transferred into the cryptocurrency world, where the absence of regulations allows for more flexible strategies. The crypto market is also known for its high volatility, providing numerous opportunities to capitalize on market movements.
During the last few years, many new prop trading firms, like FTMO or MyForexFunds and The Funded Trader emerged to create a similar model to proprietary trading in traditional finance. Although the model has changed from trading inside an institution to recruiting third-party independent traders. Today everyone with a laptop and a keen understanding of markets is able to become a prop trader and make a living from anywhere in the world.
How Does Proprietary Trading Work?
In the world of cryptocurrencies, the mechanics of proprietary trading have taken a modern twist with the emergence of specialized prop trading firms. These firms have redefined the landscape of proprietary trading by providing budding traders with a platform where they can trade on larger accounts than they could typically afford but without the traditional restrictions.
The journey begins with signing up and opening an account. But unlike traditional proprietary trading, where a trader would need to showcase their trading history, these firms focus primarily on the results, which are usually proved by completing a trading challenge.
The Admission Process
Once the account is set up, the next step is the Verification Process. This process typically involves a challenge or series of tests that a trader must pass to prove their trading skills and risk management abilities. This might include maintaining a specific profit target without exceeding a predetermined loss limit.
Upon successful completion of the Verification Process, the trader can then start trading with the desired account size. This could range from a few thousand to several hundred thousand dollars, depending on the firm and the trader's qualifications.
However, this process isn't free. There is usually a handling fee, which varies between firms, that the client must pay. The good news is that this fee is often refunded with the first payout if the trader successfully meets the conditions of the Verification Process
Conditions
Common practice is to provide traders with sufficient capital and also best-in-class analytical tools and information. This way the risk of the prop firm is minimized by ensuring the trades have a high win rate. Traders on the other hand are obligated to transfer a certain percentage of their profits to the prop trading firm. As mentioned above this split varies, but is usually much more beneficial for the traders than in traditional finance.
It is also important to note that the entity formally executing the trades is still the prop trading firm, posing some restrictions on the strategies that traders may use.
Benefits and Drawbacks of Proprietary Trading
As with any kind of appealing financial instrument, proprietary trading also has both positive and negative aspects. The comparison below may help you decide whether proprietary trading would be suitable for you.
Why it May be a Good Idea to Start
There are several advantages to becoming a proprietary trader, particularly in the field of cryptocurrencies. First, traders are given access to a large amount of capital, which allows for trading at much higher volumes than they could typically afford. This opens up the opportunity for higher profits and allows traders to make a living solely on their trades.
Furthermore, traders are also provided with advanced tools and resources to analyze market trends, assisting them in making informed decisions. Networking and cooperation are a big part of being a successful trader, therefore traders have the opportunity to learn from and network with other successful traders and professionals in the industry. Lastly, the flexibility and remote nature of the work make it an appealing career choice, as trading can be done from anywhere and at any time.
Drawbacks and Challenges
However, proprietary trading also comes with a set of challenges. The financial markets, particularly the cryptocurrency market, are volatile and unpredictable. Therefore, the risk of losing capital is high. Traders need to have a vast understanding of market trends and risk management strategies to be successful.
As mentioned above, to prove their skills traders have to get verified by completing a set of challenges in a training environment. These challenges tend to be rather difficult and not every trader will become eligible to work with a prop firm.
Once accepted, traders can experience pressure to perform and deliver results as they are working with borrowed capital. This can be both a benefit and a drawback depending on the type of workflow you have. Some people tend to operate better under stress, while others can experience stress and burnout if not properly managed.
Self Trading vs Prop Trading
| Aspect: | Self Trading | Prop Trading |
| Capital | Traders use their own capital. In some cases could not be sufficient to make a living. | Large capital borrowed from the prop firm. Possibility of high profits. |
| Risk | A trader is fully responsible for the risk he/she takes and carries consequences. | A Trader may be partially exposed to the risk or not at all. Usually, the prop firm carries the risk and consequences. |
| Reward | The whole profit belongs to the trader. No external conditions to follow, except for taxes. | The prop firm is entitled to a certain percentage of the profit. This varies from firm to firm. |
| Starting Conditions | No special requirements apart from an exchange account and some starting capital. | Traders have to complete challenges to become eligible and also get verified. |
| Tools and analytics | Basic tools and indicators available freely. The majority of the high-quality trading tools either require paid subscriptions or coding knowledge. | The prop firm provides top analytical trading tools and algorithms to ensure maximum profitability. |
| Flexibility | Traders may execute whatever transactions they like. No conditions to bind them apart from the exchange. | Prop firms often do not allow overly risky strategies to protect their capital. Traders are bound to a certain extent. |
Popular Proprietary Trading Firms
When it comes to selecting a proprietary trading firm for cryptocurrency trading, it's essential to consider several factors such as the firm's reputation, the capital they provide, its profit split ratio, and the support and resources they offer to traders. Let's take a closer look at three well-known and two rising prop trading firms.
FTMO
FTMO first started in 2015 founded by two Czech developers. This firm enables its traders to choose from a variety of instruments, such as FOREX, commodities, indices, and also crypto. After completing a 2-factor evaluation you will get access to up to $400K in an FTMO trading account.
The first part of the evaluation process includes the FTMO challenge during which traders showcase their skills and consistency. In the second part, you will get verified by completing KYC protocols.
FTMO is one of the most successful prop trading firms and has a market history to prove it. The profit split begins at 80:20, but after meeting scaling requirements can range up to 90:10.
MyForexFunds
MyForexFunds is a well-established funded (prop) trading firm in traditional finance, offering traders positions to trade FOREX, CFDs (Contract For Difference), and commodities. MyForexFunds established 3 trading programs with varying degrees of trader experience:
- Rapid - three-month demo training program with integrated rewards. During this time MyForexFund assesses your trading abilities and decides whether you move on to the next account type.
- Evaluation - a type of account suitable for semi-professional traders wanting to access more capital. MyForexFunds provides a maximum of $300K with this account type and profit splits (up to 85%) occur once a month.
- Accelerated - this account type is tailored for profitable full-time traders who wish to skip the evaluation and access more capital instantly. It can scale to up to $2M and payout occur weekly.
The Funded Trader
The Funded Trader program is one of the largest prop trading initiatives on the market right now. They offer a gamified interface inspired by fantasy gaming, as well as a wide array of trading programs to suit different experience levels of traders.
In order to become accepted, traders must complete a challenge of their choosing. The Standard two-phase challenge includes reaching a profit target with a maximum loss of up to 12%. The 1st Phase of the challenge takes 35 days and the Verification phase takes up to 60 days.
Traders can get funded initially from $600K during challenges up to $1.5M in the scaling program if they show consistent profits. The profit split is 90:10 on behalf of the trader from day one.
New and Rising Prop Firms
Billions Club
BillionsClub is a fresh and innovative addition to the proprietary trading space. Founded by experienced tech entrepreneurs and seasoned traders, Billions Club aims to provide industry-leading experience. The platform has designed a robust challenge - a 45-day assessment period where traders demonstrate their profitability before earning access to the firm's capital.
Billions Club offers a wide array of instruments ranging from FOREX and stocks to crypto, backed up by a generous profit split of up to 90:10 in favor of the trader. Traders also benefit from comprehensive education programs and analytical tools provided by the firm.
The education programs are created in-house by Billions Club in their own studio, providing useful content to anyone wishing to stay on top of markets. Community support is also an important aspect
My Funded FX
My Funded FX is also one of the emerging players in the prop trading space. With their scaling program traders can manage up to $600K of capital. Profit split for traders can range up to 80:20 and payouts are conducted through Deel.
Users can choose between the 1-step and 2-step evaluation programs, where the 1-Step is suitable for more experienced traders with higher profit requirements, but also faster verification. During the 2-step program, traders are challenged to prove their skills by reaching a 10% profit target with a maximum loss of 8%. The challenges are not bound by time and can be finished in a single trade.
A cornerstone of My Funded FX is their open communication with the community and willing customer support on every part of their trading journey.
FAQs
Which prop firms offer crypto?
FTMO and BillionsClub are prop trading firms that offer cryptocurrency trading. They allow traders to engage with this volatile and potentially profitable market using their provided capital.
How to get payouts from prop firms?
Payouts from prop firms are usually made on a monthly or weekly basis, depending on the firm's policy and the type of account a trader holds. The process typically involves submitting a withdrawal request. Once the request is processed, the agreed profit share is transferred to the trader's bank account or digital wallet. For instance, My Funded FX processes payouts through Deel, a platform designed for secure and easy international transactions.
What are the best prop firms?
The "best" prop trading firm can vary based on a trader's needs, experience level, and trading strategy. However, some of the top prop trading firms include FTMO, MyForexFunds, BillionsClub, The Funded Trader, and My Funded FX. Each of these firms offers unique programs and conditions that can cater to different types of traders.
Do prop traders make money?
Yes, prop traders can make a decent amount of money depending on their skills and strategy. They execute trades using the firm's capital and earn a share of the profits from successful trades. The profit split is typically in favor of the trader and can go as high as 90:10, as seen in firms like FTMO and The Funded Trader. However, it's essential to remember that trading is inherently risky, and losses are possible.
What are the risks of prop trading?
Prop trading carries several risks. Firstly, while the capital used for trading is provided by the prop firm, traders could still face financial loss in terms of their profit share from unsuccessful trades. Secondly, if a trader consistently fails to generate profits, they may lose their partnership with the prop firm. Also, most prop firms have drawdown limits to manage risk, and breaching these can lead to the termination of the trading agreement. Lastly, market risk is always a factor in trading, as global economic events can significantly impact financial markets.
