How to Start a Prop Firm of Your Own: Detailed Guide

The brokerage service industry is continually evolving, with digitalised platforms opening the door for more innovation and globalisation of trading services and activities.

Proprietary trading is making a buzz in the financial markets. Its challenging nature and unique characteristics set it apart from current market trends. More investors demand prop trading services, making it a highly profitable business.

This niche market was valued at $6.7 billion in 2020 and is expected to grow by a CAGR of 4.2% between 2021 and 2028. More impressively, the search for the term “prop trading” increased massively by 8,409% between 2020 and 2024.

So, what all this hype is about, and how to start a prop firm successfully?

Understanding Prop Trading

Proprietary trading means when a financial institution uses its resources and capital to invest in the market and generate income. This model requires the organisation to trade across different asset classes and financial instruments rather than offering brokerage services.

Classically, brokerage firms utilise their clients’ money to invest in various markets and make income from commissions and other service fees. However, in proprietary trading, the institution uses its prop fund to increase its wealth.

The prop firm can use its in-house brokers to invest in the market or attract professional investors to trade on its behalf.

Can you Start a Prop Trading Firm?

Existing brokerage firms can integrate a prop trading solution, adding a new business line and increasing their revenue or start a prop trading firm from the ground up.

However, when hiring experienced investors, brokers must set several challenges to find the most elite professionals with years of practice and advanced skills.

The challenges involve several investment objectives, such as achieving specific returns, doubling the given capital, and avoiding losing more than a minimum amount. Investors must make accurate and timely decisions to pass the challenges, which qualifies them to use the firm’s funds, resources, and software and share the profits with the broker.

Are Prop Trading Firms Profitable in 2024?

Prop trading opens up more monetisation opportunities for brokers. They can implement profit-sharing models to earn a cut from the challenging traders’s activities. The firm can also share earnings with those who complete the objectives and trade using the company’s resources.

Moreover, brokers can set a fee for participating in the competition, and those who do not achieve their goals can re-take the challenge for a fee.

Benefits of Starting a Proprietary Trading Firm

There are many reasons why starting a prop trading firm is a lucrative idea. Whether as a standalone business or an extension of an existing brokerage firm, here are the advantages of proprietary trading.

Broad Market Access

Prop trading is a global trend in which brokers, retail traders and institutional investors are increasingly interested. This growth is still in its early stages, and brokers can capitalise on its massive potential.

Therefore, it is an innovative way for businesses to open a prop firm and compete on a global level by offering the most demanded services.

Income Diversification

Launching a prop trading solution expands your reach to new markets, more clients and more revenue streams. There are different profitability models in proprietary trading.

You can earn from charging entry fees to challenges for new participants and those who want to re-take the challenge. You can receive investment revenues from the trader’s activities as they attempt to reach their objectives. Some goals may include investing in growing markets or doubling a given capital in actual markets.

Once you hire investors who complete their tasks successfully, you can implement several profit-sharing methods to earn from the trader’s activities. Nevertheless, you can create investing templates from successful trading systems and sell them as copy-trading strategies.

Client Acquisition Strategy

Contrary to traditional brokerage practices to acquire clients, which include different marketing strategies, advertisements, and social media campaigns, prop trading enables you to attract clients with a single offering.

Not only this, but you can also attract top-notch investors with vast experience and analytical skills to trade for their and your goals, creating a win-win scenario.

This approach contributes significantly to your income diversification strategy, allowing you to earn from offering brokerage services and direct investing activities these experienced investors implement.

Lowering Operational Costs

Converting leads from interested individuals to clients can be costly. There are different sale funnels, lead generation firms and other intermediaries that will charge you for their services. 

Retail brokers employ different marketing campaigns and advertising efforts to capture potential customers, which can be costly. Moreover, inexperienced traders require broad educational materials, support efforts and other investments before they become experienced.

However, attracting skilled traders whose trading is their bread and butter lowers your cost-per-action and enables you to focus on the main platform’s operations and offer your investors the best features.

Easier Money Management

Conventional brokerage firms deal with funds from a massive number of clients, each in different currencies, payment methods, tax systems, and settlement cycles. This financial complexity requires advanced accounting and money management skills.

Brokers must utilise advanced security systems to safeguard deposited user funds and transactions. However, prop trading firms deal with their own funds, leading to simpler money management and more flexible financial practices.

This approach also results in fewer fees payable to payment processors because the broker trades with their funds and enters two-way transactions.

Less Regulatory Complexities

Prop trading is still in its preliminary stages, and financial regulators have yet to create formal jurisdictional regulations and frameworks. As such, proprietary brokerage firms can try innovative approaches to capitalise on these opportunities and make as much money as possible.

It is easier now to start your own prop firm because the nature of this niche requires fewer financial requirements for account segregation, investor compensation schemes, and other financial insurance programs.

How Much Money You Need to Start a Prop Firm?

The costs depend on the target market where you are launching your prop trading business and the license requirements for operating legally.

A significant portion of your budget will go to integrating a prop trading solution. This cost depends on the features offered, trading software, challenge monitoring, and client acquisition program. You can estimate a yearly fee between $10,000 to $50,000.

Afterwards, you will pay to obtain the license and apply to become a legal financial service provider. Although prop trading might not have dedicated license requirements, as a brokerage firm, you will need to get a particular financial license that can go up to $10,000.

Moreover, some jurisdictions might require an initial operational capital in your bank account. This is not practically a fee you must pay, but it is a financial requirement that you must consider.

Other payments that you need to consider are marketing efforts and ad campaigns. You might integrate various services, such as payment gateways, live chat, AI capabilities, e-mail service, CRM system, and trading software, which are paid differently.

How to Start a Prop Firm From Scratch: Step-by-Step

Creating a proprietary trading firm can open new horizons to expand your business, improve your operations and boost your revenues. However, you must carefully plan your approach. Here’s how to start.

1. Find a Platform Provider

The first thing you need is a technology provider that can equip you with the prop trading platform that best suits your needs. The prop solution will include a challenge template creator, acquisition programs, trading software, and access to financial markets.

These elements compose the core trading operations, which attract investors, design competitive investment tasks, monitor traders’ performance in real time, and ensure seamless order execution.

The chosen prop trading solution must ensure flexibility in selecting profit-sharing modes, creating challenges, and evaluating transparently.

2. Build Your Tech Stack

Once you secure the trading platform for your prop trading activities, you must develop and integrate other technologies to support your system. These services include payment systems and crypto payment gateways to allow investors to withdraw their revenues using the preferred method.

You can also integrate a legal compliance tool like a KYC verification plug-in to conduct client background checks. You must also configure the hosting service provider for data storage and database structure.

To support your clients, you will require a customer service package that includes live chat, chatbot, and e-mail. Social trading and copy trading are rising in popularity among trading venues, which you can also support to enable investors to copy and create copies of their trading systems.

3. Prepare The Legal Side of Things

Depending on your area of operation, the financial regulator may require initial capital, background checks for board members, or financial recommendations. Hire a legal team and prepare these documents in time, as processing them can take several weeks to months.

It might not be necessary to obtain a prop trader’s license, but you need to acquire a business permit to operate as a financial brokerage service provider. Additionally, you must submit an anti-money laundering protocol and risk assessment strategies to secure your traders’ funds.

4. Integrate a Prop Firm Liquidity Provider

Sourcing liquidity is crucial for your own prop trading firm. The liquidity partner provides access to financial markets across various asset classes and instruments. Therefore, it is vital to find a prop liquidity provider that connects you with the broadest range of liquidity venues, tradeable securities, stock exchanges and more.

Improving your platform’s liquidity helps you offer the best trading conditions, including tight spread ranges and low transaction fees.

Check the liquidity coverage of your provider, review the liquidity aggregation and distribution practices, and ensure connections with multiple top-notch venues to offer the best trading conditions.

5. Create Investing Challenges

Key elements of your prop firm are the trading challenges. Create reasonable and challenging competitive tasks to ensure that only the best investor with a compelling trading strategy becomes a prop investor at your firm.

When choosing the prop trading solution for your business, settle for the one that allows you to monitor, customise, and track real-time performance. Providing an intuitive layout with simple user interfaces is vital for challengers to navigate, choose, and track their progress seamlessly.

Set up your pricing plans to participate in and re-take the prop challenges, the profit-sharing scheme for successful traders, and the capital provided to prop investors.

6. Prepare a Marketing Strategy

A proprietary trading platform involves fewer marketing expenses than retail brokers because prop firms target a specific market segment. On the other hand, a multi-asset brokerage firm has a broader target market, leading to more costs in social media campaigns, advertisements, and promotions. 

Prop brokers focus their resources on professional investors, using dedicated channels, such as online communities and referral programs, where professional investors are available.

You can include introducing broker and affiliate marketing strategies to motivate other businesses and institutional investors to refer other traders to your platform in exchange for a commission.

7. Create a Risk Management and Security Strategy

Choose a platform that offers various risk control measures to minimise the impact of prop traders’ risky strategies. These tools also help candidates plan their trading approach accurately and simplify their objective accomplishments.

You can offer maximum drawdown risk limit, cash daily risk limit, cash loss risk limit, and loss-limit orders to avoid exposure to unexpected market movements, especially in highly volatile markets and securities.

8. Ensure Continous Monitoring and Improvement

Conduct regular internal audits and technical checks to ensure consistent platform performance and avoid service interruptions. This includes rigorous software testing before launching your platform and real-time system monitoring to identify and eliminate anomalies on time.

Use the back-office CRM analytics to improve your service based on customer feedback and preferences to remain competitive.

Common Challenges For Prop Trading Firms

With various benefits and multiple revenue stream opportunities, prop trading seems like the ideal business in the brokerage industry. However, there are numerous drawbacks and challenges for prop firms.

Regulatory Uncertainty

The prop trading regulatory environment is evolving, and the industry’s future depends heavily on whether any restrictions are placed on prop proprietary brokerages and traders’ activities.

Increased Costs

Building a successful prop trading business requires a significant investment in developing sophisticated software and real-time tracking systems, creating and managing traders’ challenges, and accessing trading venues.

Unexpected Returns

Markets are unpredictable, and most prop trading firms rely on traders’ activities and profitability to generate income.

A significant amount of time is required before realising remarkable profits. The proprietary broker must invest substantially in promoting the platform before building consistent income sources.

Conclusion

A proprietary trading business can be lucrative if you know how to start a prop firm from scratch, including finding the right technology partner, liquidity provider and trading software company.

This venture requires significant investment and careful planning to create the challenges, design the profit-sharing models and attract seasoned investors to your platform.

You can use our 8-step guideline to launch the best prop firm and capitalise on the growing market trends.