In recent times, online searches related to what prop trading is and its intrinsic characteristics have been spreading.
Prop trading can be considered the first form of trading financial instruments, which came before the trading of derivative instruments to protect against risks associated with commodity trading. Many companies offer this type of service, but the question arises spontaneously:
what is it and how has it developed over the years.
The Meaning and Peculiarities of Prop Trading
Prop trading means "
proprietary trading" and consists of a part of trading where speculation reigns supreme. In this case, market making and sales activities are absent, but it represents the activity as it is known by insiders. The trader in this branch is similar to a
proprietary trader of a large bank, but with more limited capital and tasks. Before the 2008 financial crisis, the
prop trader was a prominent figure, on par with a famous soccer player or basketball player, obviously in the financial environment. This individual was highly sought after by financial institutions such as mutual funds and investment banks, and was paid very well, with figures exceeding even a million dollars.
Characteristics of Prop Trading Pre and Post 2008
As mentioned before, the figures involved in prop trading had a strategic importance for the large banking institutions operating in the markets. Before the housing crisis in the USA, large investment banks had a group of prop traders to whom part of the institution's budget was allocated to carry out trading autonomously, without risk constraints and instruments to use. In exchange for this great decision-making autonomy, but also great responsibility, they were compensated with a fixed part, plus bonuses upon achieving high performance, reaching over a million dollars a year.
All of this vanished with the sub-prime mortgage crisis, and all the people occupying the typical roles of prop trading lost their compensation and bonuses. Some went down with the market at the time, while others left the circle of large investment banks and decided to open their own
proprietary trading companies. Subsequently, the figure of the prop trader lost importance in the landscape of large investment banks, as security requirements increased by regulatory authorities. In this new context, the allocation of part of a bank's liquidity for a purely speculative activity was not viewed favorably by central authorities.
The moral of the story is that
prop trading has become a highly widespread job, losing what was its specialization. Many consulting firms offer training courses specifically to learn how to be a prop trader. Readers might ask:
what are the differences between a prop trader and a simple retail trader? They seem the same thing, but there are very important differences.
Difference Between Prop Trading and Retail Trading
The first colossal difference between prop trading and retail trading is whether one is employed by an entity or not. The prop trader is characterized by being employed by an investment fund or family office. This configuration of trader uses the resources made available by the company, such as hardware, software, and capital, to carry out market operations on financial instruments and obtain a profit, divided between the trader and the company based on what is established between the parties. An example that closely resembles these characteristics is the
prop trading carried out by banks.
As for the conditions established in prop trading, the trader and company establish all the technical characteristics of their relationship. They can decide how the trader should operate, whether with software provided by the prop trader themselves or with the technology of the financial company. In the latter case, the company may ask for a larger share of the potential profits derived from the operations. It should be considered that the percentage of earnings established at the beginning can vary over time, increasing or decreasing, based on the prop trader's demonstration of reliability and technical preparation.
As mentioned before, in prop trading, the trader can be provided with the entire infrastructure to operate in the markets. We are talking about software and hardware that a retail trader can hardly imitate, if not by incurring very high costs. We are talking about infrastructures such as highly stable connections (colt connections) and advanced data analysis programs. Another difference, if not the most important one, is the capital endowment of the prop trader compared to the retail trader. The former certainly has a higher amount of resources at their disposal, and their task is simply to profit in the markets with that amount made available. After this exposition, the differences between prop traders and retail traders appear evident, but this does not detract from the fact that the latter can make a qualitative leap. In fact, a retail trader can become a prop trader for an investment fund or other financial company. It is enough for them to have a good history of performance to be able to sit at the table with the big players and start earning higher compensation.
Prop Trading Sites to Make the Leap in Quality
A first prop trading site to mention is 5%ers (The-Five-Percenters). This site provides financial resources and growth paths for forex traders around the world. This fund was created with the goal of giving more prominence to retail operations, with higher capital and possibilities for greater earnings. They offer different types of accounts based on the type of risk the trader wants to operate with and the amount of resources available. For this type of service, The-Five-Percenters receives a sum of money, increasing based on the risk profile and the amount requested to operate.
Another noteworthy prop trading company is FTMO, born in 2014 from some daytraders in an office in Prague. This company has created the FTMO Challenge, a trading challenge to create a class of new talented traders. It starts with fictitious capital, and one must achieve objectives to move on to the next phase. In the next phase, there are other objectives to move on to operating with real money provided by FTMO.
Last but not least, The Funded Trader, a prop trading platform that allows you to operate through large amounts of capital (you can register here). Also on this platform, there is a challenge composed of two validation phases, and the last step is that of the professional trader. Passing the initial phase is a prerequisite for the next one. Once you reach the end of the challenge, you will operate with resources provided by The Funded Trader, and there is a division of the recorded profits between the company and the trader. By entering the coupon code
okforex in the cart, you can get a 5% discount on your challenge.
