A couple of weeks ago I wrote about managing prop flow, an article that gathered more of a response than I’d envisaged it would.
The ATFunded team disagreed with some of the points made in that article. I figured it would be fun to have them put their arguments into writing and have an article responding to mine.
So without further ado, here’s what the team at ATFunded had to say.
Prop flow can be hedged
After reviewing David Kimberley’s article, ATFunded offers a counter perspective drawn from our experience in the proprietary trading space. To address his arguments clearly, we’ve organized our rebuttal around his key points, providing insights from our operations.
Prop Trading and Sports Betting
Kimberley compares prop firms’ risk management to sportsbooks, where odds are adjusted and bet sizes capped to limit exposure. He suggests prop firms must constantly “move the needle,” sidelining skilled traders (the “card counters”) while relying on less sophisticated ones (like “Grandma Betty” with her coins).
We see this as an oversimplification. Adjustments to rules often reflect initial frameworks that were too lenient, requiring temporary fixes. As newer models emerge with practical, tested rules—beyond mere marketing ploys—the need for frequent changes lessens. This reflects current market dynamics, not an inherent flaw in prop trading.
High Leverage in Prop Trading
Kimberley highlights that prop firms offer nominal leverage (e.g., 100:1), but with a 10% max loss limit, the effective leverage can appear much higher, such as 1000:1. He ties this to the concept of “buying drawdown,” but let’s clarify.
Take a trader with a $100k account and a 10% drawdown cap. If they earn $10,500 in profit, their leverage doesn’t decrease—buying power remains tied to account size, not the inability to lose 100%. Hedged trades further challenge his view: leverage doesn’t scale as implied, yet trades still occur. This isn’t traditional leverage—it’s a distinct mechanism shaped by prop firm rules. Rather than mischaracterize it, we should recognize it as a unique risk tool.
Assessing Trader Skill
Kimberley argues that high leverage obscures the difference between skilled traders and gamblers, with rapid gains or losses clouding true ability. Evaluating skill in prop flow, particularly in pre-funded stages, can indeed be challenging—we agree. Most users mirror typical retail behavior and can be managed accordingly. The difficulty spikes during low-liquidity news events, where erratic trades distort the view. Remove those, and patterns emerge—like overnight range trading or longer-term swings. Filter out this noise, and the flow becomes more predictable, making skill assessment less like guessing and more data-driven. Context, not just leverage, is key.
Risk Management Challenges
Kimberley notes that, unlike traditional brokers with two-way flow, prop firms can’t adjust pricing to offset exposure, and hedging is complicated by high notional values and no client margin. Defining “risk management” for prop firms is critical. Not all flow can be hedged—correct—but risks differ. “Rule risk” stems from weak structures (e.g., 15% drawdown, no daily cap, 1:500 leverage, news trading permitted), setting firms up for failure when payouts exceed revenue. “Simulation risk” arises when accounts lack real market ties, as seen in firms hit by latency arbitrage. “Cheating risk” involves traders exploiting loopholes—like pre-news account buys or cross-firm opposite trades—addressed by limits or bans. Mitigate these, and “order flow risk” becomes more manageable, resembling retail patterns. Hedge outliers for profit, apply a C-book to the rest—it works with proper controls.
Potential for Significant Losses
Kimberley cautions that a failed high-leverage trade could severely impact a prop firm’s liquidity provider accounts. Losses are part of trading—no denying that. If hedged traders falter, it’s expensive but not catastrophic, thanks to pass rates and rules like daily or trailing drawdowns (e.g., 10% on a $100k account).
A firm might hedge selectively—say, $100k across ten strong $100k accounts—capping risk while leveraging drawdown limits to moderate “effective leverage.” Unlike traditional brokers, prop firms can guide trader behavior, promoting consistency and education. Losses occur but are constrained by design.
Gambling Industry Analogy
Kimberley likens prop firms to casinos unable to hedge roulette, adjusting parameters to curb unhedgeable risks. Hedging is feasible—it just demands strategy. Prop hedging aligns with brokerage tactics but benefits from rules shaping flow and outcomes. Some firms may mimic a casino model, but that’s not the norm. A trader hitting payouts with hedgeable traits can create mutual gains. Drawdown rules—far from mere leverage amplifiers—limit downside, enabling firms to pass viable flow to markets profitably.
Our ATFunded+ program shows this: profiling flow and integrating top traders into copy trading reduces risk, boosts volume, and balances the equation. It’s calculated, not a gamble.
Conclusion
Prop order flow can be hedged with robust rules, effective systems, and capable teams to handle its nuances. As technology and models advance, growing familiarity with customer flow will enhance hedging and alpha generation. Kimberley’s critique highlights today’s obstacles, but ongoing innovation is steadily peeling away the “unhedgeable” label.
