How to Start a Prop Trading Firm: Ins and Outs

All thanks to ESMA’s tightening of CFD trading regulations, a growing number of FX and CFD brokers started looking into adding prop trading to their business models or even switching to prop trading altogether. This has resulted in a booming prop trading industry.

Prop trading firms don’t fall under current regulation as they charge for access to trading challenges which 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 attempted to generate profits from the rise and fall of financial assets rather than just from commissions or fees.

These institutions would hire professional traders to place and manage these trades. The traders speculated with the capital of the institution in question and were remunerated based on their performance.

The emergence of retail prop trading

Most institutional trading activities eventually find their way to the world of retail trading. Just like traditional proprietary trading, retail prop trading is a form of trading or investment activity in which a trader or investor is provided with funds by a broker to trade on their behalf and hopefully to make a profit.

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

Successful candidates who pass all the relevant tests are then awarded a “funded account” allowing them to trade on behalf of the firm and earn a share of the profits. A prop trading firm only offers access to real funds after a trader completes this 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 to 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, meaning that they can trade the assets they’re most familiar with, rather than having to trade 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, are not really provided with much in the way of guidance after their accounts are verified and funded.

Retail prop traders have to work within the guidelines of the trading challenges they take part in. This has the effect of focusing their activities and providing them with trading goals.

Why is prop trading so popular as a business?

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

Prop trading firms earn revenue from fees or subscriptions that they charge clients in order to access their trading challenges. All trading is conducted on demo accounts, and even “funded traders” are usually not directly trading with the firm’s capital directly, the firm copies the trades of funded trades at its discretion.

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

For these reasons, retail prop trading remains unregulated. Unlike CFDs, which are strictly regulated nowadays, prop trading firms are able to attract retail clients without the oversight that CFD brokers are obliged to receive, or the restrictions now imposed 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 according to local regulations.
4. Find and set up 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. Work out a risk management strategy and 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 do not currently require a regulatory license in order to operate. Like any other business, proprietary trading businesses must be registered as corporate entities and register corporate bank accounts in order to be able to receive payment for the services they offer.

Retail prop trading businesses do not currently come under financial services regulation for a number of reasons.

1. The services they offer involve trading competitions and performance evaluation through simulated trading.
2. Any trading that does take place is either conducted 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 for them.

Finding the right technology

An easy, affordable, and bullet-proof way to launch a prop trading business is via a prop trading platform. It provides all the tools for managing clients and exposure and 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 rest of the funds are required for all the measures described above.

Most prop trading firms provide access to real funds only after carefully evaluating their traders’ abilities, and traders usually have to pay a sign-up fee before entering the trial process. In some cases, proprietary trading firms provide access to live trading for a certain fee, but the funds provided aren’t substantial, and monitored trading metrics are strict.

Are prop trading firms profitable?

The profitability of prop trading firms directly correlates to their ability to attract clients, keep them engaged, 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 up maximum drawdowns, so if your client loses more than a predefined percentage of their initial account balance, all their positions will be automatically closed. The client will have access to their account in read-only mode.

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 tackling from 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 finds itself in a grey area somewhere 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 does take place is an exchange of services that has much more in common with online gaming than financial services. Retail prop traders effectively pay a fee or a subscription in order to take part in trading challenges.

The overwhelming majority of prop traders do not end up qualifying for funded accounts. This means that prop firms make the lion’s share of their revenues from running these trading challenges, rather than from funded traders successfully speculating on 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 on to real markets at their own discretion and according to their 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 can also be a detriment to the reputation of the space as a whole.

The future is uncertain as far as retail prop trading regulation is concerned. Regulators, particularly in the US, are showing increased interest in the prop trading phenomenon but have not been able to successfully initiate any action 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 against the CFTC by the firm’s lawyers it was admitted by the regulator’s lead attorney that the investigation had been conducted in a “careless and sloppy” manner. The CFTC has subsequently put four of its lawyers and one investigator who worked on the case on administrative leave due to accusations 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 no-doubt arising due to 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 did not make any public statements regarding the decision, a leaked email by one of their sales managers was circulated. It stated that US firms using MT5 are required to be regulated by FINRA (Financial Industry Regulatory Authority) and the NFA (National Futures Authority), regardless of whether they are using it in demo mode.

Many prop trading firms enjoyed access to the platform via agreements with brokers (MetaQuotes licensees) that would “grey-label” the platform to them, essentially allowing them to use it via 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 takes place on demo accounts, the company does not benefit in any way from supporting the activities of prop trading firms.

The company has been on the receiving end of actions against its platforms in the past, such as when Apple decided to remove the mobile versions of MT4 and MT5 from its app store in 2024. It appears that the company’s move to distance itself from the US prop trading market was defensive in nature.

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 are able to 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 if you get a white-label prop trading platform like our DXtrade.

Contact us for a consultation on how to start a white-label prop trading firm.