The number of people looking to start a prop firm (or funded trader company) has risen dramatically in the past few years. This is in large part due to the success of FTMO and other companies that entered the industry early on.
The process to start a prop firm is somewhat similar to how you would start a FX/CFD broker, albeit with some significant differences around regulation, tech set up, and risk management. As that implies, if you are looking to start a prop trading company, but are from a background in the broker sector, you need to be aware of the differences.
In this article we’ll look at how to start a prop firm, including licensing, prop firm CRMs, prop firm trading platforms, and more.
What is a prop firm or funded trader company?
A prop firm has traditionally referred to a small group of people – it could literally be one person – trading money on a company’s own account. This is not what we are talking about in this article, so if you are look to start a prop trading firm of that variety, you’ll have to look elsewhere!
Here we are talking about a different kind of prop trading business model that emerged in the 2010s, in which clients pay to take a trading challenge on a demo account.
If they pass that challenge, they are given capital to trade with. Profits the trader generates via any subsequent trading activity are split between the trader and the prop firm. A trader pays to take the challenge because the amount of money they are given to trade with, if they pass the challenge, is likely to be far in excess of what they have themselves.
The prop trading firm makes money in two ways as a result.
- They make money from people paying to take challenges
- They make money on profits derived from trades placed by traders who have been allocated capital to trade with
How does a prop firm challenge work?
A prop firm trading challenge typically requires a trader to hit a certain profit target over a set period, with restrictions on how much money they can lose and the tactics they can use to trade.
Prop firms charge a fixed fee for traders to take a challenge. They also typically offer several different challenges at varying prices. These can be as low as $100 or in excess of $1,000.
The trading challenge takes place on a demo account. That means no deposit is taken and the trader never places real trades.
Challenges are typically structured so that they cannot be abused. For example, it is common for traders to be required to place a certain number of trades, so they can’t just luck out on one massive trade and then pass the challenge.
The ultimate purpose of the challenge is to evaluate a trader’s performance and see if they can generate profitability, but without taking on massive risk or by using some sort of scammy method to trick the prop firm.
How does a prop firm funded account work
If a trader passes a prop firm challenge, they are given a funded account with. Sometimes this involves a so-called ‘scaling plan’, where the more successful a funded trader is, the more capital they are given to trade with.
Funded accounts are structured in lots of different ways.
A common method is for a trader to continue trading in a demo account. Some or all of their trades are then mirrored by the prop firm in a real money account. Any profits those trades generate are split between the trader and the prop firm.
Other providers give successful traders an account with a broker. Others will give them access to a corporate account.
The funded account component of a prop firm is probably the part that is going to be most difficult for a company looking to start a prop firm to manage. This is because there are both trading risks and regulatory hurdles that need to be overcome and managed.
1. Start a prop firm – do you have the money?
As you can probably infer from this description of how prop firms work, they are very much open to manipulation. The result is that it is now common to see bad actors, who clearly have no capital, looking to start prop trading firms.
It should go without saying but if you do not have the capital to provide traders with a funded account, then you shouldn’t be looking to start a prop firm. If you are claiming that your company has money that it doesn’t, there is a high chance you are committing fraud.
As a result, the first thing you need to think about is whether you have the money to start a prop firm. If you don’t, then by doing so you face huge legal risks.
2. Prop firm regulation and company incorporation
Firms offering funded trader programmes sit in a regulatory grey area. This creates some problems for anyone looking to start a funded trader company.
The reason for this is simple. To start a prop firm, you need to register a business. At the time of writing, the most popular country to start a prop firm company appears to be the UK.
The most important thing we see with regard to starting your company is how prop trading is regulated in the country you are thinking of setting up in.
We think there are two key things to think about here.
1. Prop firm trading challenge regulations
There are two key facets of prop trading challenges that we think are important when it comes to regulation.
One is that the prop firm never takes a client deposit. The other is that the trader never trades real money or on a real account. All trading is done on a demo account. This means no real trading is ever undertaken.
We believe the result of this is that prop firm challenges are effectively unregulated. Indeed, we are unaware of any jurisdiction where activity of this kind is explicitly regulated.
As a result, many props have not really considered where they are getting regulated and are setting up in places like the UK or other developed markets. We believe this is risky. That is due to the potential for regulations to apply to the funded trading component of the prop model.
2. Prop trading funded account regulations
Funded trader accounts are more subject to regulation. This is due to the fact props may ultimately enter into real trades or even provide capital to clients directly in order to let them make real trades.
Any time you enter into a real trade, there is a high likelihood that you are engaging, in some shape or form, in regulated activity.
Ultimately how this is regulated will depend on how you are structuring real trading activity and where your company is registered. For example, prop firms executing real trades that are based in the European Union, UK, Australia, and several other jurisdictions are subject to trade reporting regulations.
Why prop firms are structured as two different companies
The fact that the funded account offering of prop firms may involve regulated activities is why providers often set up two companies.
One company will offer the challenges. The other company manages funded accounts.
Some providers choose to register the challenge company in a more developed market, like the UK, but then offer funded accounts via an offshore entity. Others will register both companies in the same jurisdiction.
Whatever you end up doing, we recommend paying serious attention to how your ‘real’ trading is structured. Failing to make sure you are meeting the required regulatory standards can result in serious repercussions.
How to not start a prop trading firm
One of the ways we see some props setting up their funded accounts is to provide successful traders with a real money account directly. They do this via a standard CFD provider offering.
However, the key point here is that they are the ones operating this platform.
In other words, they are operating in exactly the same way that a CFD provider would. The difference is that they put money into a trader’s account, rather than the trader making a deposit. The trader then trades against the prop firm. It should go without saying that this is a terrible idea.
You are taking on huge risks if you start a prop trading firm and use this model. Leaving aside the fact that you are opening yourself up to committing fraud, like My Forex Funds allegedly did, this is not how any legitimate prop firm operates.
You are running a securities dealing business. Unless your company is based in a region where such activity is unregulated, this is likely to result in huge fines for you and potentially more serious problems.
3. Choose a prop firm CRM
Customer relations management (CRM) software is used in almost every business to manage relations with clients. Prop CRMs are fairly unique and you need to think carefully about which one to use.
In fact, choosing a prop CRM is arguably the most important thing you’ll have to do when you start a prop firm. A prop trading CRM is what lets you set up challenges, manage accounts, and monitor what clients are doing.
A prop trading CRM also includes the client portal. This is what a trader who takes your challenges will see when they are trading. They can use this to do things like monitor performance, buy challenges, or, if the CRM provider you use offers them, see different widgets, like news feeds or trading signals.
We think there are a few key things to think about before you get a prop firm CRM.
1 Does your prop CRM work with your trading platform?
We’ll look at trading platforms shortly, but a key thing to know is whether the prop CRM you want to use is compatible with the trading platform you want to offer clients. A lot of prop CRMs have multiple integrations, meaning they can work with different trading platforms.
However, that’s not true across the board and some prop CRMs only integrate with one trading platform, typically MT4 and/or MT5. At the time of writing, we believe this can pose a risk to props as MetaQuotes has shut down several companies offering prop services.
If you have a CRM that is only compatible with MetaQuotes products, this could cause problems down the line as a result. This is because a CRM provider that has multiple integrations can switch you over to another trading platform provider. If the CRM provider only offers one integration then they can’t.
2. Does the prop CRM have the tools you need?
When you start a funded trader programme then you may have a specific business model in mind. For example, you may want to structure challenges in a certain way or monitor client exposure on a particularly granular level. Whatever the case, you need to make sure the prop CRM that you offer has those features.
Another point to note here is simply the user experience. In other words, two CRMs may offer a similar set of features but one may have much better user experience than the other. Obviously you should go for whichever suits your preference.
3. Does the CRM have the tools your traders need?
One of the things we notice about people with a brokerage background who want to start a prop firm is that they assume the needs of prop trade customers are the same. They aren’t and a prop CRM is consequently different.
We think there are two key points here.
One is essentially the ability for the trader to see their performance in granular detail and understand how they are performing relative to the challenge. This is extremely important when it comes to failure because clients often (and understandably) get frustrated when they fail a challenge. A CRM needs to show clearly why that happened.
The other point is what you could broadly describe as trading tools and widgets. This could include trading news, analytics tools, or trading signals. These things can be kept within the client portal or the trading platform, so arguably this is less critical than having good performance analytics.
4. Choose a prop firm trading platform
Choosing a prop trading platform is obviously going to be a key part of starting a prop firm. Things have changed a lot in the past couple of months in the prop trading platform space and it’s worth looking at what’s gone on here to understand why that’s the case.
MetaQuotes and prop firms with grey labels
Until recently, the majority of prop firms operated using MetaTrader gray labels.
A MetaTrader gray label is where a company has its own marketing and sales channels. However, the trading platform it uses is run by another company. This company’s logo and branding also appear on the trading platform.
This is why a lot of prop firms, at least until recently, sign up clients and get them to open accounts with different FX/CFD brokers. The trading then takes place on demo accounts opened with those brokers.
Why is MetaQuotes banning prop firms?
MetaQuotes is not banning prop firms but they have taken action against props operating using gray labels and stopped other providers from offering services to US clients. This is most likely because it involves huge risks for MetaQuotes and the company gains nothing from it.
We believe this is primarily because props have been onboarding US clients, where OTC derivatives are regulated very differently to other parts of the world. Moreover, MetaQuotes does not normally charge brokers using its software for demo accounts. As many props operate exclusively via demo accounts, MetaQuotes makes no money from them.
The result is that MetaQuotes stands to lose a huge amount from prop grey labels but gains nothing from them. Seeing things this way, it’s easy to understand why they have been pressing brokers to stop offering grey label services to prop firms.
Other trading platforms for prop firms
There are plenty of other trading platforms out there on the market today, so even if you can’t or don’t want to offer MetaTrader, there are alternatives.
In some ways props face a chicken and egg problem here. It’s hard to know what prop traders want until you start a prop firm. But to start a prop firm, you need a prop trading platform.
As such, we think it’s worth doing market research and understand which provider has the sorts of tools your clients are going to want. That way you can find the best fit.
5. Prop firms banking and payments
Making sure you have good access to payments and banking services is a key part of starting a prop firm. We think this is also one that is overlooked.
Banking and payments providers can make life difficult for firms in areas, like prop trading, that are either unregulated or in a regulatory grey area.
As such we suggest having multiple payment providers in place to mitigate the risk that one of them stops serving you.
Another factor to be aware of here is corporate governance and compliance. Making sure that you are meeting the most stringent regulatory requirements possible means it will be much easier to open a corporate bank account and maintain a relationship with that bank.
6. Challenge set up and abuse monitoring
Before going live, it is worth thinking carefully about how to structure the challenges you offer clients.
We think there are two components to challenges that anyone look to start a prop trading challenge should be aware of.
1. Making sure features are in place to find good traders
Assuming you actually want to find good traders, then you have to put in place rules that weed out – to as large a degree as is possible – people that are lucky.
A simple example of this is minimum trades. Someone could easily put all their money down on one trade, get lucky, and then pass a challenge. This is obviously not someone you want to allocate real capital to.
Trading rules are thus a way of figuring out who is actually good at trading and who is just lucky.
2. Stopping scammers
Scammers have heavily targeted prop firms, using things like latency arbitrage techniques or simple two way trades.
Putting specific challenge rules in place can stop scammers from taking advantage of your prop firm and, in effect, stealing money from you.
3. Trading rules
Another way to stop scammers is to put in place rules that explicitly prohibit certain behaviours. For example, you can put in your terms and conditions that latency arbitrage trading is not permitted and anyone who tries to use it will be banned, without a refund.
Having these rules in place is vital as otherwise, in theory, someone that is trying to scam your company isn’t doing anything wrong when they try to do so.
7. Start a prop firm website
To start a prop firm, you need a way for clients to find you. This is going to be via your own website. A lot of CRM and/or trading platform providers will also help you set up a website.
However, this is typically a white label. In other words, it’s a generic site with your branding on it, which may not be particularly customisable.
Building a website is often an afterthought for providers. But given it’s often the first point of contact that your potential client has with your prop firm, it is worth investing in.
Starting a prop firm – final thoughts
Starting a prop firm or funded trader programme, whatever you want to call it, is now a fairly straightforward process. This is because regulation is relatively light touch and there now lots of technology providers that can help you set up quickly.
However, we think it is worth thinking through each of the stages outlined above. We see so many providers making silly mistakes or not thinking long-term about how they are going to operate.
Ultimately you want your prop firm to succeed. Taking a few moments to think things over when starting out is a simple way to do that.