How Do Prop Firms Work?

Prop firms, or proprietary firms, are companies which offer traders the opportunity to utilise their skills and knowledge of trading to make money and work for their firm. 

Prop Firms 

There are several key characteristics of prop firms that differentiate them from other types of trading firms and traders. 

Prop firms are often high institutions with a wealth of capital at their disposal which allows them to trade in multiple markets, as well as trade against themselves in order to drive the market up and increase their profits. 

Online trading

They are usually more specialised than traditional investment companies as well. Prop firms will usually specialise in a specific type of market, meaning they can build their knowledge and expertise and become better at trading in specific areas. 

This helps to achieve better trading results as they are able to focus on one area, rather than having to spread across multiple, and therefore may be able to dominate that specific sector and generate more profit. 

As prop firms use their own funds in order to trade, rather than using their clients, it is often a safer option for clients who do not want to directly risk their own money, but are instead willing to pay for the services of a prop firm. 

Prop Traders 

To understand how prop firm trading works, you first need to understand what prop trading and prop traders are. 

Prop trading is a type of trading where assets are bought and sold on behalf of a company or employer. Prop trading firms will buy and sell on behalf of clients, using their own capital rather than their clients with the goal of increasing their overall profits for both the company and the client. 

Controlling capital.
Controlling capital.

These large financial institutions will bring in established and skilled prop traders in order to help grow the company’s funds and to buy and sell as many assets as possible, generating wealth and increasing their capital. 

A prop trader is different to a regular trader as they don’t use their own funds in order to trade, whereas regular traders will often need to risk their own money in order to make a profit. 

It can also be a better option for companies to go with prop firms and traders over independent traders, as prop traders do not have access to or control of any of the clients accounts which can make it more secure. 

For this reason, it can be a more attractive option for traders as they don’t stand to lose any of their own funds should the market crash or a trade goes wrong. 

It can take a long time for a prop trader to become established enough to earn a significant amount of money. When starting out as a trade it is important to remember that it may be difficult to begin with and working your way up takes time and patience. 

How do prop firms work? 

There is a sequence which most prop firms follow in order to establish themselves and become successful. 

They first start by raising money and gaining capital. This is done through investors or by utilising profits made from previous trades. Once they have generated enough wealth, they can begin the trading process. 

They will then employ prop traders to work on behalf of the firm. There are many ways to hire prop traders. More traditional forms of hiring such

as referrals or recruitment are often used, however, there are more unconventional ways to source talented prop traders. 

This can include trading competitions where traders will go head-to-head and compete to see who can generate the most profit from trading over a specified amount of time. This allows traders to showcase their skills and expertise. 

Often, once these traders have been hired, they will be subject to skill evaluations and risk assessment via simulating trading and evaluation programmes, 

These help the firms to assess how suitable the traders are for the role and whether they are able to safely handle large amounts of money and generate profit without putting the funds at risk. 

These tests are done before the trader is granted access to the firm’s capital and if they are not deemed skilled or experienced enough, they will likely be released from their role so as to protect the firm’s capital. 

If the traders are found to be suitable, they will be given access to a wide range of resources with many different software and data available to them as well as access to various financial markets in order to trade across multiple platforms efficiently and effectively. 

Access to these advanced softwares and up-to-date information allows them to follow the movements and updates of the trading markets as quickly as possible so as to make the right decisions in buying and selling assets. 

Rather than prop traders risking their own money and generating their own profit, they are given a percentage of the profits they generate. This is usually performance-based, meaning those who make trades which generate the most profit will receive a larger percentage.

This creates a competitive market, pushing prop traders to work to their best ability in order to generate the most profits, therefore earning the most money. 

This works in favour of the trader, the firm and the clients and creates an environment where everyone is working towards the same end goal- to generate as much profit as feasibly possible. 

Prop firms offer skilled traders the opportunity to trade with incredibly large sums of money which most would not usually have the ability to do, giving them a better chance of earning considerable profit with no risk of losing their own money. 

Being a successful prop trader requires patience and a willingness to learn and develop skills and experience. It also requires discipline and extensive knowledge of the specifics of trading strategies in order to ensure success and minimise the risk of loss. 

How to become a prop trader 

Financial analyst monitoring forex exchange numbers in office

It can take a significant amount of time to become an established prop trader and therefore patience and perseverance are necessary to succeed. 

Companies are unlikely to hire inexperienced prop traders and therefore in order to be successful, you will likely need to spend some time trading independently and building a portfolio of successful endeavours before attempting to enter a prop firm. 

The first step in becoming a prop trader is to spend time learning the basics. You will do best with a background in finance. The finance industry is built from people with strong academic backgrounds and great knowledge of how the financial world works. 

A background in economics, business, finance or statistics will put you in good stead and give you the foundational knowledge required to become a successful trader.

Most companies will require you to have at least a bachelor’s degree in a subject relevant to the financial industry and you may find it difficult to secure a job with a prop firm if you do not have the relevant academic qualifications. 

Having further qualifications will open up far more opportunities also, therefore if you are able to pursue a master’s or further educational degree in the financial sector, you may appear more desirable as a potential employee. 

You will also need to have significant experience in the industry in order to secure a role. As companies are unlikely to hire someone with no experience, the best way to seek this is through internships. 

Interning at a prop firm or other investment institutions is a good way to gain first-hand experience as a trader as well as develop your knowledge and skills in trading as well as learn how to properly and effectively navigate the world of finance. 

There are many benefits to prop trading which simply cannot be experienced in other trading roles and this is part of the reason it is such an exciting and desired job. 

For traders, working in these roles allows them access to many more resources and funds in order to become the top of their game, trading incredibly large sums with ease and agility, something most others never have access to. 

It also helps to make trading a less isolating affair. Most independent traders are constantly working against each other therefore making it hard to foster positive work relationships. 

However, working in a prop firm means that you and all other traders in the company are working towards the same goal which helps to build positive relationships and create a healthy workplace environment.

This is further helped by the fact that everyone in the company benefits from each other’s success, meaning you are encouraged to do the best job you can not only for your benefit but for others as well. A win for you is a win for the team, so everyone is encouraging and supportive. 

Prop trading can give those who are confident in their skills as a trader the means to excel in their role, increase their knowledge and expertise in trading and help them to propel their careers. 

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