Prop trading has changed a lot in the last couple of years. We’ve had a major shakeout as a result of platform changes, gold trading at the start of this year, and a more ‘winner takes all’ environment, with a small number of firms dominating the sector.
I sat down with Mihai Gheorgian, a business development manager at Centroid Solutions, and James Hodgman, the founder of The Upside Funding and a veteran of investment banking FX desks, to talk about how the industry is maturing, the hidden war on system abusers, and why the future of retail trading looks a lot like an internal hedge fund.
You can listen via the buttons below or read a synopsis of our conversation.
David: Let’s start with the macro picture. If we look back a year or two, there was this frantic rush into prop trading. Now, the wind seems to be blowing in a different direction. Mihai, what are you seeing from the infrastructure side?
Mihai Gheorgian: Most definitely. On a macro level, it’s very evident that the industry is in a consolidation phase. It’s a true filtering of the firms that are going to last for the long term. I believe the days are gone where an entrepreneur can just launch a prop firm and have instant short-term success. The “race to the bottom”, basically the commoditization behind simply selling cheap challenges, it’s just not sustainable. There has to be a sense of what makes you special as a firm. The answer is no longer just because you have a challenge fifty dollars cheaper than the next firm.
David: James, you launched The Upside Funding relatively recently, but you come from the institutional world, managing FX desks at places like Citi. How does that background color how you look at this shifting landscape?
James Hodgman: Mihai is spot on. you have to have some sort of differentiator, and it’s typically a hard thing to come up with. My co-founders and I are former managing directors and heads of trading from investment banks. We’ve run prop businesses within that investment banking framework, and we realized credibility in this industry is something well-needed and desired from the client base.
We want to leverage what we did in the investment banking framework and offer actual guidance. In the standard retail prop model, owners look at really good traders as a liability to the business because payouts eat into their margins. But coming from our background, we realize really good traders are an asset. If you can flip the script and copy-trade your best talent in the background, you’ve essentially built an internal hedge fund.
David: That brings up the core operational puzzle: risk management. When volatility spikes. as it has recently with gold, how do you actually manage that backend exposure without just praying the traders fail?
James Hodgman: It’s a massive challenge. For us, about seventy-five percent of the trades going through our platform are in gold. In a perfect scenario, half your traders are long gold and half are short, providing a perfect hedging scenario where you don’t actually need to hedge. But it’s never perfect. What we do is run correlation and beta analysis on the other asset classes our traders enjoy, mapping them back to gold to create a singular synthetic gold index that we run twenty-four hours a day. If our deviation of risk moves outside a certain tolerance, we hedge it.
We also track our traders across sixty different live metrics, focusing heavily on behavioral analytics. We can know if a trader loses two in a row, he’s likely to lose the next two because of his previous behavior. We know if he’s a better trader in the Asian session than London, so we’ll hedge him in Asia and not London.
Mihai Gheorgian: That’s exactly the direction the sustainable firms are moving in. The modern prop firm is essentially sitting on a data gold mine. It is entirely about what you do with that data. How you process and apply it to align your interests with the traders themselves. We often deal with startup firms that just don’t have that mentality adopted yet. They are still trying to operate with the adversarial mentality of 2023 or 2024, and we have to actively work to educate them on this transformation.
David: Let’s talk about the darker side of that equation. A year or so ago, the big conversation in the space was heavily focused on system abusers and scammers trying to game the firms. Has that subsided, or has it just evolved?
Mihai Gheorgian: It has absolutely evolved, and it’s becoming highly sophisticated. The basic exploits are easily banned now, so abusers have moved to “cross-firm” activities. They’ll open an account at a traditional broker and an account at a prop firm, and at market open on high-volatility assets like gold or the US30, they’ll execute full-margin opposite trades to exploit latency. They do it prop-to-prop, broker-to-broker, and they account-roll to hedge arbitrage.
Lately, we’re even seeing cross-firm, cross-asset abuse where they bridge CFDs to Futures. We developed our Prop Shield system precisely to track these coordinated rings executing balance manipulation across our ecosystem. It’s a constant race between the abusers and the platforms.
James Hodgman: The reality is that a small group of abusers penalizes the honest traders because firms are forced to tighten their rules. You can try your best to mathematically hedge market risk, but you can never truly hedge human behavior, fear, or greed. Some firms just accept a certain level of abuse as a cost of doing business, but that becomes dangerous very quickly. If you look at your ledger at the end of the month and realize fifty percent of your payouts went to malicious rings, your business model is in jeopardy.
David: Looking ahead toward the end of the year and into the future, where does the industry go from here? What is the survival strategy?
James Hodgman: The industry is maturing, and the names that have survived have built real trust. But the barriers to entry are much higher; the marketing and ad spend required to stay competitive right now is eye-watering.
Ultimately, we see the industry moving toward a “one-stop shop” model built on three pillars: CFDs, Futures, and prediction markets. You’re going to see prop firms offering an integrated ecosystem where a trader can trade, get a virtual IBAN, and use a branded debit card. If you give them that stickiness, what used to be a standard payout liability actually turns into a revenue-generating asset.
Mihai Gheorgian: I completely agree on the one-stop-shop evolution. We’ve seen this consolidation of services happen successfully in the neo-broking and digital banking spaces with platforms like Revolut, Robinhood, or eToro. They didn’t survive by just offering one slice of the pie; they offered the whole thing. The prop firms that survive the next phase will have to adopt that exact same level of institutional-grade, multi-asset diversification to remain sticky for the traders.
