Starting a financial firm in the 2020s can often feel like starting a marathon when everyone else feels 20 miles ahead.
It can seem like it will take a lot of hassle, complexity and networking to start, with meaningful potential gains limited to the most successful of companies. However, this is not necessarily true with a proprietary trading firm, particularly if you choose the right technology partner.
Part of the reason for this is that prop trading offers firms the chance to pit their own capital, own people and own strategies against the market, with the potential to maximise potential gains due to not having to share that money with clients.
It is also nowhere near as difficult to set up a prop firm as it used to be, allowing traders and managers to focus on developing a strong trading plan and fundamentals.
Here is a short guide to setting up a prop trading firm, and the flexibility of the prop trading world means that there are far fewer steps to starting than you might expect, allowing for flexibility in developing the optimal strategy for long-term gains.
Whilst this is framed as a step-by-step guide, a lot of the steps will inherently overlap with each other, so you can work on several at the same time.
Step One – Start With An Idea And Grow It
Ultimately, a prop trading firm needs effective management and a strong business plan to succeed.
Whilst many of the traders who work with and for your firm (more on that later) will bring in their own experience and innovative strategies, the big picture is up to the firm’s management and leadership, which will typically be you.
The specifics do not need to be immediately baked in, the vision and overall goals of the firm, which markets you aim to specialise in, how you will handle risk management and some rough but realistic estimates for financial projections are an essential starting point.
The better your initial plan, the better you can sell it to traders, talent and investors.
Step Two – Get Approval
Once you have a plan and are certain that setting up a prop firm is right for you, learn the regulations in your region for setting up a proprietary trading firm and which institutions you need to register your prop firm with.
This will vary wildly based on the location where your prop trading company is established and what types of financial activity you intend to undertake.
For example, some firms in the United Kingdom may fall under the Financial Conduct Authority (FCA), while some in the United States would be required to join the Financial Industry Regulatory Authority (FINRA), a part of the Securities and Exchange Commission (SEC).
Step Three- Secure Initial Capital
Networking is a core part of a traditional brokerage because firms need to attract clients, and whilst that requirement is not as necessary with a prop firm since it is your money, acquiring a lot of initial capital is extremely important.
There are a lot of ways to get this capital, whether it involves spending one’s own money, getting an investment loan, operating funding rounds or a wide variety of other ways that financial companies get starting capital.
Step Four – Get Your Technology Set Up
Financial investment requires a simple-to-use, secure and robust trading platform that meets the needs of your business, the needs of any financial regulatory bodies and the needs of your traders.
Whilst it is possible to hire developers to create a bespoke platform or buy a license for an off-the-shelf solution, the best way to approach trading tools is to work with a technology partner to develop a white-label software suite.
Hiring developers can be very expensive unless you already have a very clear vision of what tools you need and how they may need to adapt to the changing market, and an off-the-shelf solution can make it difficult to attract talent since skilled traders could just buy the same tools.
A white-label provider provides the best of both worlds, offering an established, reliable technology solution at an affordable cost whilst also offering room to tweak it to your needs and add your firm’s branding.
Look for a technology partner that will work closely with you, is clear about responsibilities, costs and service expectations, and will help ensure that you succeed since they win when you do.
Attract Talent
Prop firms make money through two primary funding models, and the key to both is to make them as attractive and competitive as possible to acquire the best talent.
The first step is in the initial evaluation. Prop traders will typically pay an initial fee which may or may not be refunded upon passing an evaluation. This tests their financial skills in a test environment on the real platform they would be expected to use.
Set up your evaluation based on how you want your investors to behave on the market. Prioritise risk management, long-term success and rules that avoid encouraging risky trades.
Following this, have a profit-sharing model that incentivises strong performances, which can be up to 80 per cent of trading profits, often on a tiered levelling system based on meeting certain performance thresholds.
