Adding prop trading is an obvious move for lots of brokers. They already have most of the infrastructure they need to do it, the clients seem similar, and, if you compare it to something like stocks, crypto, or options, it’s arguably the simplest new revenue stream to put online. Plus it’s more immediately profitable than those other products.
Maybe it’s no surprise then that one of the most read articles (ever) on TradeInformer was about whether or not brokers could add prop trading. Lots have already done it, including big names like Hantec, IC Markets, and Oanda.
But are brokers set up to do better than props which have no background in the brokerage industry?
Working this out is no mean feat. Most props are private and registered somewhere which makes it impossible to access a company’s accounts. No one will tell me anything and if I go and ask how things are, the inevitable response will be ‘yea, really good mate’. Seeing as they would probably tell me that if I called them while they were on the Titanic after it had just struck the iceberg, that’s not much help either.
So the following is my theory and a rough approximation of what I see in the market. Am I right? Am I wrong? You be the judge.
- Balance sheet
Someone once quipped that people who are already rich tend to get richer, whereas people who have nothing end up losing what little they have. Something like that anyway.
A lot of brokers have big balance sheets today and can basically keep throwing money at this until it works. They can also invest more in branding and marketing activity.
Perhaps most importantly, they can withstand the shocks that ‘sharp’ prop clients can end up creating.
To put this in another way, if you are playing poker against someone and they have 20x as many chips as you then they can bleed you dry very easily. It’s not implausible that the same could happen in the prop space – a lot of brokers have lots of cash and can beat props in marketing spend, maintaining high operational costs, and dealing with large payouts.
- Operational set up
Another factor for brokers is the fact that they have a lot of the infrastructure in place to make this business work.
There are a few points here.
One is technology. If you are a broker you already have a trading platform and, even if one of them makes it difficult for you, this means it’s easy to get up and running with a prop offering. Some props may just not be able to do this full stop.
Next is what you could broadly define as ‘operational’. Brokers have had to deal with a lot of shocks regarding regulation, payments, and marketing. Having the corporate set up and finance teams to deal with this is not easy. Another facet of this is being blocked from marketing on Google and Meta platforms.
This hasn’t happened to props yet but would you be surprised if it did? And assuming it does, who is going to be better set up to handle that? Note that we have already seen what happens with these shocks because MetaQuotes rug pulled a bunch of props last year, which meant a bunch of them got cooked.
Finally, brokers are more used to the intricacies of setting up a dealing desk and everything that entails. From some of the stories I’ve heard, I would not say this applies to props. Some might argue this is relevant for hedging, although I don’t really see how you could hedge any of this flow. The more important part to me seems like making sure conditions are correct and spotting abuse. This is a huge problem for props. Brokers have already been dealing with it for decades.
- XP
The final point is hard to define but I would broadly describe it as hands-on knowledge or as our friends in Cyprus say ‘τέχνη’.
A lot of people in this industry have very domain specific experience that you cannot acquire overnight, whether that’s working on payments, trading, affiliates, finance, or basically any other function that you have in a broker.
This experience is hard to accrue and props do not have it. As a result, brokers will be able to outcompete props because of that experience.
Objections
Or will they?
The other alternative is that actually props will defeat brokers in the prop sphere and potentially even come into the broker space and take even more market share from them. Why is that?
- Brand
Something we looked at last week is the value of brand. It seems weird to say this because props aren’t really that new but my guess is that if you ask someone who is in the know ‘think of a prop’ they will immediately think of a small handful of firms – something along the lines of FTMO, Funding Pips, FundedNext, 5%ers, and Alpha Capital. There are others but you get my point.
These guys are already huge and if you look on a site like Reddit when people are discussing this industry, they seem to default to one of them automatically.
This is not something that is easy to replicate and thus far, I would say FXIFY is the only broker-operated prop that has achieved it.
Moreover, one of the weird phenomena of this industry is that being regulated seems like it is actively working against a lot of companies because none of them want to rock the boat and associate their brand with it.
For example, IC Funded is in St Lucia and there is no clear link on the IC Markets website to the prop. Oanda’s prop does not appear to accept UK or EU affiliates. The result is that the traffic and credibility that operating a broker should bring, doesn’t necessarily pass on to the prop firm.
- Marketing and product
As with the ‘techne’ point above, most people that set up props seem to ‘get’ the product and how to market it in a more intuitive way than others.
As one example of this, if you go and look at the YouTube channels of the bigger firms then (1) a lot of them are massive (eg. FTMO has >400k subs), (2) their production value is good, and (3) it’s catering to an audience that they clearly understand. This is not easy to replicate.
To put this in another way, eToro’s Founder and CEO Yoni Assia is, by all accounts, 100% genuine when he says he believes in crypto. If you look at the CFD players that have managed to successfully add crypto as an asset class, are there any that have done it as well or made it as big a part of what people associate with their company? I would say ‘no’.
The point being that if you know your product and like it, plus know your audience, it seems more likely that you’ll be able to make it work.
- Is experience overrated?
The final point to note is that having longevity does not necessarily result in better outcomes. CMC Markets and City Index, for example, are both much older than Plus500 is, with the latter only going live in 2009. Today Plus500 makes a lot more than CMC Markets and City Index.
My point being that, even as experience brings with a lot of positives, it can also be debilitating and stop you from understanding or wanting to launch new products.
Another facet of this is size. It’s not a surprise that none of the brokers that have launched props are publicly-traded. Moreover, if you are at a firm with 100s or even 1000s of people, it can be very cumbersome to launch a new product or to even improve your existing one. As a result, large brokers won’t be able to compete with props.
- Cash in the bank
The final point I’d make is that, while some brokers may have a lot of cash, a lot of props now do too. FTMO made over $200m in 2023. The My Forex Funds case, which involved even larger sums, is a sign of how much cash some firms are making.
So even though there may be a lot of guys without much cash in the bank, there are already a few props that have a lot of money behind them. The result is that they will not be easy to bleed out and a few may even have bigger warchests than most brokers. These companies aren’t going anywhere.
