Over the past few years, the interest in proprietary trading firms has increased exponentially, in no small part because more people have access to trading platforms than ever before and there is a huge number of people investing with unconventional and non-standard financial backgrounds.
This means that a lot of people either want to make the transition to running a prop firm from retail trading or working for a financial firm or want to invest their own money into a financial business but do not necessarily know where to start.
With that in mind, here is a short, simple guide to let you know where to start, what technology systems you need and how you can make your business stand out to get the best possible trading talent.
Learn The Market And Set Up A Business Plan
The first step is to acquire all of the knowledge you need to effectively trade within your chosen market, and draft a comprehensive business plan shaped around the market, your firm’s vision, goals, strategies, funding requirements, expected financial projections, income and outgoings.
The more knowledgeable you are at first, the easier it will be to access capital, the more straightforward the approval process will be for licensing purposes and the more likely it will be that you can attract the best talent with the right profit-sharing scheme.
Get Licensed
The next step is to set up the legal structure of your company, which will shape the flexibility, tax obligations and personal liability.
Most prop firms operate as either a limited company or corporation, depending on their structure, and it is essential to get advice from an appropriately qualified accountant to ensure that your company is set up in the right way.
As for licensing, you will need authorisation from the Financial Conduct Authority before you will be legally able to operate as a prop firm, so this should be one of the first steps you take once you have a business plan and a company structure.
Secure Your Starting Capital
As with any other business, there are initial costs to get the company going and to ensure it has the runway to grow and thrive as a business. Some of these are a legal requirement as part of the regulation and licensing process, whilst others are necessary expenses for doing business.
It is important to check what type of prop firm you intend to run, as depending on the permissions you need you could require a minimum of £750,000 due to the fact that you are trading on your own account.
This is a good place to start, but you also need to earmark money for high-quality trading platforms, server space or a server room, and risk management systems.
Finally, you need to pay for licenses to ensure that your business is legal to operate.
In total, you are likely to need a minimum of a million pounds in starting capital, although the more money you have the longer your runway will be and the greater your ability to manage volatility in the markets you intend to trade in.
Some people will have the financial flexibility to fund the operation themselves, which does dramatically speed up the launch time, but it is also worth exploring potential funding sources such as venture capital.
Set Up An Trading Platform
The next step is to find a technology partner that can help you to set up a bespoke or white-label trading platform.
A white-label system allows you to add your branding to an existing platform provided by an experienced technology provider, as well as add adjustments to include tools, analytics and systems required as part of your business plan.
The trading platform is the engine that helps make a prop firm move, so it is a massive decision to consider, and the right platform will depend on the types of trading strategies and markets you intend to operate in.
Your trading platform also needs to work with your company’s risk management protocols, as the easier your rules are to follow through the trading platform, the more likely that they will be followed.
Recruit Quality Talent
There are a lot of avenues for recruiting in prop firms, but by far the most popular is the funded challenge model.
This is a system where prospective traders will pay an application fee and be given a test platform and a profit target they need to hit within a time limit and without too heavy a drawdown.
These tests, which can be one or two-stage depending on the programme, will ensure that anyone who trades with you is able to manage a live account and real portfolio.
This is also where you can provide incentives in the form of profit-sharing ratios that reward traders who are consistently successful.
