How to Start a Prop Trading Firm: Ins and Outs

Following ESMA’s tightening of CFD trading regulations, a growing number of FX and CFD brokers are considering adding proprietary trading to their business models or switching to it altogether. This has resulted in a booming prop trading industry.

Prop trading firms are not subject to current regulation because they charge for access to trading challenges that take place in a simulated environment.

Whether you want to start your prop trading firm or add a prop trading offering to your existing brokerage, the best time is now. This article will explain how you can set up a prop trading business quickly and easily. But, as usual, let’s dive into the basics first.

What is prop trading?

Prop trading, short for proprietary trading, refers to trading on behalf of a business or financial institution.

Originally, the term referred to banks and other financial institutions taking speculative positions on markets with their own capital. In this way, they sought to generate profits from the rise and fall of financial assets rather than from commissions or fees alone.

These institutions would hire professional traders to place and manage these trades. The traders used the institution’s capital and were compensated based on their performance.

The emergence of retail prop trading

Most institutional trading eventually finds its way into retail trading. Just like traditional proprietary trading, retail prop trading is a form of trading or investment in which a trader or investor is provided with funds by a broker to trade on their behalf and, ideally, to generate profits. 

Before a firm provides funds, however, the trader must undergo an evaluation process to demonstrate their skills. These usually take the form of trading challenges conducted in a “paper trading” environment, where no real money is at stake. 

Successful candidates who pass all relevant tests are awarded a “funded account,” which allows them to trade on behalf of the firm and share in the profits. A prop trading firm grants access to real funds only after a trader completes the trial.

Why is prop trading so popular among traders?

What makes retail prop trading so attractive is that the only requirement is to pass the various challenges. Traders don’t have to be licensed investors or prove themselves in any way beyond successfully passing the evaluation period. 

Retail traders are also attracted to prop trading by the wide variety of available asset classes, allowing them to trade assets they’re most familiar with rather than markets where they may feel they have no edge. These asset classes include FX, stocks, indices, commodities, precious metals, and crypto.

Many retail prop trading firms present their services as a form of trading education. CFD traders, by contrast, receive little guidance after their accounts are verified and funded. 

Retail prop traders must adhere to the guidelines of the trading challenges they participate in. This focuses their activities and sets trading goals.

Why is prop trading so popular as a business?

Prop trading is attractive as a business because it’s relatively risk-free compared with managing a brokerage or a financial exchange. 

Prop trading firms earn revenue from fees or subscriptions charged to clients to access their trading challenges. All trading is conducted on demo accounts, and even “funded traders” typically do not trade with the firm’s capital directly; the firm copies their trades at its discretion. 

For these reasons, no capital is at risk for either the trader or the firm; no funds or securities are held; and revenues depend on how many traders sign up for the various challenges, rather than on volume and spread markups, as with traditional brokers.

For these reasons, retail prop trading remains unregulated. Unlike CFDs (contracts for difference), which are strictly regulated today, prop trading firms can attract retail clients without the oversight that CFD brokers are required to maintain or the restrictions on how they offer their services. 

What may seem like a regulatory loophole has led to an entirely new business model that both traders and brokers seem to be happy to support.

How to start a prop trading firm?

Starting a prop trading business is pretty straightforward:

1. Get in the loop about the financial industry, get proficient in trading and investing, and work out your high-level business ideas.
2. Get into details—transform your high-level ideas into a comprehensive business plan that includes your objectives and strategy.
3. Register your company in accordance with local regulations.
4. Identify and implement trading technology you’ll offer your clients and use to manage your exposure.
5. Hire your staff to run the dealing department, helpdesk, marketing, etc.
6. Develop your marketing strategy, launch a website, and start attracting clients.
7. Develop a risk management strategy and identify target clients during the evaluation process.

Learning about the industry

Before diving into the prop trading business, it’s worth doing comprehensive research and talking to those already involved in the prop trading scene. It’s also crucial to learn the regulations of your target markets from A to Z and track all changes.

If you’re not that well-versed in legal matters, work with consultants and lawyers. The associated costs will pay off when your reputation is squeaky clean, as you’ll work strictly within legal frameworks. This will help avoid fines and legal issues and attract clients, as they know you run a reputable and reliable business.

Working out a detailed business strategy

Meticulous planning is key to escaping surprises during the implementation stage. Plan out the technology you’ll need, how much it costs, how many people you need to hire, how much you need for their payroll, and just how much you need to keep the lights on.

Do proprietary trading firms need a license?

Prop trading firms are not currently required to hold a regulatory license to operate if they offer purely an education/evaluation platform with demo accounts. Like any other business, proprietary trading firms must be registered as corporate entities and open corporate bank accounts to receive payment for the services they offer. 

Retail property trading businesses do not currently fall under financial services regulation for several reasons. 

1. The services they offer involve trading competitions and performance evaluation through simulated trading.
2. All trading is conducted either in demo mode or with the firm’s own capital.
3. Prop firms do not hold client funds, trade on their behalf, or handle financial instruments.

Finding the right technology

An easy, affordable, and bulletproof way to launch a prop trading business is via a prop trading platform. It provides all the tools for managing clients and exposure, as well as professional experience for your traders.

For your staff	For your clients
– Risk management specific to prop trading: automated and performed in real time, with maximum drawdowns and profit targets. – Trading simulation environment to evaluate your clients before providing them with real funds – Dashboard for managing traders and operations – Automated creation of trading contests	– A modern professional trading platform that makes your clients feel like pros – Widgets for traders to track their trading activity and performance – Technical analysis tools – Advanced charting with turnkey and custom indicators

How can Devexperts help?

At Devexperts, we offer a complete package for prop trading startups and brokers wanting to add prop trading to their offerings. Our white-label prop trading platform is based on the DXtrade trading platform, includes everything mentioned above, and allows you to launch at a cost-effective rate in a week.

We call DXtrade the whole package because it comes with all essential integrations, including CRM, market data, and liquidity providers.You can learn more about why trading software is at the core of white-label prop firms in this article about the challenges of prop trading firms.

How much does it cost to set up a prop firm?

It depends on the location and your target market, but if we’re not talking about the US, then as little as $15,000 might do—for example, the basic DXtrade package costs just $5,000. The remaining funds are required for all measures described above.

Most prop trading firms grant access to real funds only after carefully evaluating traders’ abilities, and traders typically pay a sign-up fee before entering the trial process. In some cases, proprietary trading firms offer access to live trading for a fee, but the available funds are limited and monitoring of trading metrics is strict.

Are prop trading firms profitable?

The profitability of prop trading firms directly correlates with their ability to attract clients, retain them, and keep traders within imposed risk-exposure limits.

The latter is easily implemented with the right prop trading technology with real-time exposure monitoring. Brokers should set maximum drawdowns so that, if a client loses more than a predefined percentage of their initial account balance, all their positions will be automatically closed. The client will have read-only access to their account.

It’s also necessary to indicate profit targets. This setting ensures your clients don’t win more than a specific percentage of their initial account balance. If a client’s account value exceeds the initially added percentage threshold, all their positions will be automatically closed.

This way, prop trading firms ensure they stay profitable.

Attracting and retaining clients is another challenge that needs to be tackled by the marketing department. A clear branding strategy, a strong reputation, and positive reviews from existing clients might help. Regular trading contests are a mighty tool for prop trading firms to engage clients.

The prop trading regulation “grey area” explained

Prop trading currently sits in a grey area between financial services and gaming. Technically, “real” trading does not take place, profits are not generated, and losses are not incurred. As a result, no client funds are handled by prop trading firms. 

What takes place is an exchange of services that is much more like online gaming than financial services. Retail prop traders pay a fee or subscription to participate in trading challenges.  

The overwhelming majority of prop traders do not qualify for funded accounts. This means that prop firms derive the lion’s share of their revenue from running these trading challenges, rather than from funded traders successfully speculating in real markets with company funds.

Even the minority of prop traders who do graduate to funded trader status are not just let loose on global markets with company money. In most cases, they continue to trade in simulation mode. This allows the business in question to forward positions into real markets at its discretion and in accordance with its own risk management criteria.

This is why it has been so difficult to regulate prop trading; the business model is designed to fall outside of the boundaries that various regulatory bodies would recognize as their domain.

Prop trading regulation efforts at present

The fact that prop trading appears to fall through the cracks of different regulators has meant that the barriers to entry are relatively slight. This is great for new firms seeking to establish themselves, but it can also be a detriment to the reputation of the space as a whole. 

The future of retail property trading regulation remains uncertain. Regulators, particularly in the US, are showing increased interest in the prop trading phenomenon but have not initiated any enforcement actions against retail prop trading businesses. With, as yet, no regulatory guidelines on the horizon, it is actually retail prop traders themselves that are currently calling for increased oversight. In a recent survey by PipFarm, 70% of survey respondents reported that they want prop trading to be regulated, with 66% wanting there to be set reporting obligations and transparency requirements, 57% wanting business conduct requirements and best practices, and 56% wanting rules to be enforced, violations to be punished, and public warnings to be issued.

Have US regulators taken any actions against prop trading firms?

In 2024, the CFTC (Commodity Futures Trading Commission) and the OSC (Ontario Securities Commission) filed lawsuits against prop trading firm My Forex Funds and its CEO, Murtuza Kazmi, for fraud. This effectively closed down the company. However, the lawsuit has been unsuccessful if it was intended to set a precedent. A subsequent legal challenge by the defendant’s lawyers led to most of Kazmi’s assets being unfrozen. 

Furthermore, in a motion filed by the firm’s lawyers against the CFTC, the regulator’s lead attorney admitted that the investigation had been conducted in a “careless and sloppy” manner. The CFTC has since placed four of its lawyers and one investigator who worked on the case on administrative leave amid allegations of misconduct.

This case has prompted other prop firms to be much more explicit about the simulated nature of the trading services they offer. Increased scrutiny is undoubtedly arising from how profitable these businesses can be and how popular retail prop trading is becoming.

Why did MetaQuotes block prop trading firms?

In 2024, MetaQuotes moved to block prop trading firms from using its MT5 (MetaTrader 5) platform for their educational challenges. 

Although the company made no public statements about the decision, a leaked email from one of its sales managers was circulated. It stated that US firms using MT5 must be regulated by FINRA (Financial Industry Regulatory Authority) and the NFA (National Futures Association), regardless of whether they are using it in demo mode. 

Many prop trading firms obtained access to the platform through agreements with brokers (MetaQuotes licensees) that would “grey-label” the platform for them, effectively allowing them to use it under their own MetaQuotes license. The MetaQuotes crackdown on prop trading firms centered around the company forcing its licensees to terminate their grey-label arrangements with prop trading firms.

MetaQuotes only charges license fees to firms that use its live servers. Since prop trading occurs on demo accounts, the company does not benefit from supporting prop trading firms.

The company has faced actions against its platforms in the past, including Apple’s decision to remove the mobile versions of MT4 and MT5 from its app store in 2024. It appears the company’s move to distance itself from the US prop trading market was defensive.

Does Devexperts support prop trading?

Yes, we do. Devexperts prides itself on being market agnostic, and we have made our flagship platform, DXtrade, available to prop trading firms.  

Prop trading firms can stand out with our feature-rich, multi-asset, web-based interface, and can also benefit from our recent integration with Nobosso’s NBS360 prop trading dashboard.

Conclusion

That’s our take on how to start a prop trading firm. As with any other brokerage business, it requires careful planning, thorough research, and adherence to local regulations. 

A prop trading firm can thrive in the current market with the right strategy, technology, and risk management plan. You can simplify the process and provide access to all necessary tools and integrations cost-effectively by using a white-label prop trading platform like DXtrade. Contact us for a consultation on how to start a white-label prop trading firm.