A Step-By-Step Guide on How to Start Prop Desk Trading From Scratch
Published on
April 15, 2025
Imagine working long hours, only to achieve minimal results with your trading. This is true for many independent traders who lack the capital and resources necessary to trade effectively. Prop desk trading offers an alternative solution. By joining a proprietary trading firm, you can quickly access a large trading account and achieve your financial objectives with a team of skilled traders backing you. If you’ve ever wondered how to become a prop trader, the process involves understanding firm requirements, proving your trading skills, and aligning with a team that matches your goals. This article will explain how to become a prop trader and set up a proprietary trading desk to help you achieve your trading goals.
FX2 Funding is a prop trading firm that can help you achieve your goals. We have resources to help you develop your trading skills, and once you pass our evaluation, you will receive a generous funding package to trade with. Our team can help you set up a proprietary trading desk and access the capital to trade your strategies.
What is Prop Trading?
Proprietary trading, commonly called “prop trading,” is a financial practice where firms or financial institutions use their capital to trade:
Stocks
Bonds
Commodities
Currencies
Other financial instruments for direct profit
Unlike traditional brokerage activities, which involve earning commissions by executing trades on behalf of clients, prop trading allows firms to retain 100% of the profits generated from their trades. This speculative approach often involves sophisticated strategies and advanced technology to maximize returns.
An Inside Look at How Prop Trading Works
Prop trading occurs when a financial institution or trading firm allocates funds to conduct market transactions. These trades are executed through specialized trading desks that operate independently of client-focused operations.
The primary goal is to leverage the firm's capital, market insights, and advanced tools to achieve higher returns than traditional investment methods such as index investing or bond yields.
Arbitrage: Exploiting price discrepancies between related securities or markets.
Volatility Arbitrage: Capitalizing on fluctuations in market volatility.
Event-Driven Strategies: Taking advantage of price movements triggered by events like mergers or earnings announcements.
High-Frequency Trading (HFT): Using algorithms to execute thousands of trades within milliseconds.
The Technology Behind Prop Trading
Firms engaging in prop trading often rely on cutting-edge technology and proprietary algorithms to gain a competitive edge. This includes access to real-time data, high-speed order execution systems, and advanced risk management tools.
One of the most significant benefits of proprietary trading is retaining 100% of the profits generated from successful trades. Unlike brokers who earn commissions on client trades, proprietary traders directly benefit from their market activities. This structure provides substantial earning opportunities, especially for skilled traders employing effective strategies such as:
Arbitrage
Market making
Algorithmic trading
Proprietary trading firms often give access to leverage, enabling traders to amplify their positions and achieve higher returns. While leverage increases risk, it also enhances profit potential when managed effectively. This combination of direct profit retention and amplified returns makes prop trading highly attractive for those with the skills to navigate volatile markets.
2. Access to Advanced Technology and Resources
Proprietary traders benefit from cutting-edge technology and sophisticated tools that enhance their ability to execute trades efficiently. Prop trading firms invest heavily in:
Advanced trading platforms
High-frequency trading systems
Algorithmic models
That allows traders to exploit market inefficiencies. These technologies provide real-time data analytics, faster order execution, and crucial automation capabilities in competitive financial markets.
For example, high-frequency trading (HFT) systems enable traders to process thousands of transactions within milliseconds, capturing small price movements that accumulate into significant profits. Algorithmic trading tools also allow traders to backtest strategies and optimize their performance based on historical data.
3. Greater Control and Flexibility
Proprietary traders have complete autonomy over their trading decisions and strategies. Unlike fund managers who must adhere to client preferences or institutional guidelines, prop traders can tailor their approaches based on personal goals and risk tolerance. This flexibility allows them to adapt quickly to changing market conditions and seize opportunities without bureaucratic delays.
Prop traders can customize their strategies across diverse asset classes such as:
Stocks
Bonds
Commodities
Currencies
This ability to diversify spreads risk and enhances profitability by leveraging multiple market opportunities.
4. Performance-Based Compensation
Many proprietary trading firms offer performance-based compensation structures that reward traders for their success. Profit-sharing agreements often allow traders to retain a significant portion of their profits, sometimes as high as 90%.
This incentivizes high performance and fosters a competitive yet motivating environment where traders are directly rewarded for their skills. This structure aligns the interests of traders with those of the firm, creating a cohesive environment focused on maximizing returns while minimizing losses.
5. Skill Development and Learning Opportunities
Proprietary trading provides an excellent platform for developing advanced trading skills. Traders gain hands-on experience analyzing:
Market trends
Managing risks
Executing complex strategies
Under real-world conditions. Many prop firms also offer training programs and mentorship opportunities that help traders refine their techniques.
Working in a prop trading environment exposes individuals to cutting-edge research and market insights that enhance their understanding of global financial systems. This continuous learning process improves individual performance and contributes to long-term career growth.
6. Competitive Market Edge
Proprietary trading firms often have a competitive edge due to their access to exclusive market information and resources. These firms invest heavily in research capabilities that provide deeper insights into market trends and opportunities.
They frequently act as market makers by offering liquidity to specific securities, which enhances their ability to influence pricing dynamics. The speed and efficiency with which prop firms execute trades further solidify their competitive advantage in fast-moving markets. Advanced technology ensures minimal latency during order execution, allowing prop traders to stay ahead of competitors.
7. Economic Contributions
Beyond individual benefits, proprietary trading plays a vital role in financial markets by contributing liquidity and improving efficiency. Prop firms actively trade large volumes of securities, ensuring smoother transactions for other participants while facilitating price discovery.
By correcting market inefficiencies through arbitrage or other strategies, these firms enhance the overall functioning of financial systems. Proprietary trading contributes indirectly to economic growth by attracting top talent into the industry and fostering innovation through investments in technology and research.
Prerequisites for Starting Prop Desk Trading
1. Educational Requirements: The Building Blocks of Prop Desk Trading
Finance/Economics: Since proprietary trading firms are nothing but financial markets’ trading firms, education or sound knowledge in finance/economics is essential.
Mathematics: Mathematical concepts help statistical tools be used for historical market data analysis in trading. Historical market data analysis is imperative for predicting the market and deciding the entry and exit positions.
Business knowledge: Business know-how is also essential for proprietary trading, which is a business of trading in the financial markets.
Computer Science: Programming knowledge (such as Python) is required for algorithm development for automated trading.
Physics: Problem-solving skills and quantitative analysis can be learned with the help of Physics-related degrees.
Both undergraduate and advanced degrees in the subjects mentioned above are beneficial. An undergraduate degree can also help you gather the required knowledge to set up the proprietary trading desk.
Having said that, an advanced degree will help with more profound knowledge, but don't worry if you don't have one. You can select a course from the range of specialisation courses to get ahead.
2. Internships: The Crucial Step Before Becoming A Prop Trader
Having knowledge or education in financial trading-related subjects is a significant first step towards becoming a successful proprietary trader, but that is not enough. Theoretical knowledge does not provide the necessary practical knowledge.
When you step into the financial market and begin trading, you learn the actual challenges. Finding solutions with the right trading strategy is what makes you better.
Gaining Practical Experience in Algorithmic Trading through Internships
Interning with a trading firm can enhance in-depth knowledge about:
Historical market data analysis
Strategy creation
Backtesting
Live execution of trading strategies
Learning algorithmic trading is optional for students and non-student beginners in the trading domain. However, the world has almost completely shifted to algorithmic trading, including Wall Street.
How Much Capital Is Needed to Start Prop Desk Trading?
1. Initial Capital Requirements: How Much Do I Need to Start Prop Trading?
Starting a proprietary trading firm requires significant financial investment, as it involves trading with the firm's capital. The amount of money needed can vary widely depending on several factors, including the:
The initial capital for a prop trading firm can range from $100,000 to several million dollars. This capital is essential for covering trading activities, operational costs, and potential losses.
Capital Requirements and Operational Costs in Proprietary Trading
Some prop trading firms may require traders to have as little as $5,000 to $10,000 in capital, while others may demand significantly more, often in the hundreds of thousands or millions of dollars. In addition to trading capital, firms must consider costs associated with setting up and maintaining their operations. These include:
Regulatory fees
Technology infrastructure (such as trading platforms and data feeds)
Office space
Staff salaries
Marketing expenses
For example, the cost of integrating a prop trading solution can range from $10,000 to $50,000 annually, depending on the features and services required.
2. Regulatory Fees and Compliance: What Other Costs Will I Encounter?
Regulatory fees are another significant expense for prop trading firms. These costs vary by jurisdiction and may include licensing fees, registration costs, and compliance expenses.
In the U.S., prop trading firms must comply with SEC regulations, which can involve substantial registration and ongoing compliance costs. Some jurisdictions require firms to maintain a minimum operational capital in their bank accounts, which is not a direct fee but a financial requirement to ensure stability and compliance.
3. Technology and Infrastructure Costs: What Will I Need to Get Started?
Prop trading firms often invest heavily in technology to gain a competitive edge in the market. This includes:
Advanced trading platforms
High-speed data feeds
Robust risk management systems
The cost of these technologies can be substantial, ranging from a few thousand to tens of thousands of dollars annually.
4. Staffing and Operational Expenses: Who Will Work for Me?
Staffing costs are also a significant consideration. Prop trading firms need skilled traders and support staff, including IT professionals and compliance officers. Salaries for these positions can be high, especially for experienced traders and technical personnel.
5. Marketing and Growth Expenses: How Will I Attract Traders?
Potential prop trading firms must budget for marketing and growth initiatives. This includes branding, promotional activities, and expanding operations to attract more traders or investors.
How to Start Prop Desk Trading From Scratch
1. Find a Platform Provider
To kick off your prop desk trading journey, find a tech provider that meets your needs. Start by researching proprietary trading platforms and the services they offer. The right solution for your operations will depend on how you structure your prop trading firm. The solution will include a challenge template creator, acquisition programs, trading software, and access to financial markets.
These elements compose the core trading operations, which attract investors, design competitive investment tasks, monitor traders’ performance in real time, and ensure seamless order execution. The chosen prop trading solution must provide flexibility in selecting profit-sharing modes, creating challenges, and evaluating transparently.
2. Build Your Tech Stack
Once you secure the trading platform for your prop trading activities, you must develop and integrate other technologies to support your system. These services include payment systems and crypto payment gateways to allow investors to withdraw their revenues using the preferred method. You can also integrate a legal compliance tool like a KYC verification plug-in for client background checks.
You must also configure the hosting service provider for data storage and database structure. To support your clients, you will require a customer service package that includes:
Live chat
Chatbot
Email
Social trading and copy trading are rising in popularity among trading venues. You can also support them by enabling investors to copy and create copies of their trading systems.
3. Prepare The Legal Side of Things
Depending on your area of operation, the financial regulator may require initial capital, background checks for board members, or financial recommendations. Hire a legal team and prepare these documents in time, as processing them can take several weeks to months.
Obtaining a prop trader’s license might not be necessary, but you need to acquire a business permit to operate as a financial brokerage service provider. Additionally, you must submit an anti-money laundering protocol and risk assessment strategies to secure your traders’ funds.
4. Integrate a Prop Firm Liquidity Provider
Sourcing liquidity is crucial for your prop trading firm. The liquidity partner provides access to financial markets across various asset classes and instruments. Therefore, finding a prop liquidity provider that connects you with the broadest range of:
Liquidity venues
Tradeable securities
Stock exchanges
And more is vital
Improving your platform’s liquidity helps you offer the best trading conditions, including tight spread ranges and low transaction fees.
Check your provider's liquidity coverage, review its liquidity aggregation and distribution practices, and ensure connections with multiple top-notch venues that offer the best trading conditions.
5. Create Investing Challenges
Key elements of your prop firm are the trading challenges. Create reasonable and challenging competitive tasks to ensure that only the best investor with a compelling trading strategy becomes a prop investor at your firm. When choosing the prop trading solution for your business, settle for the one that allows you to monitor, customise, and track real-time performance.
Providing an intuitive layout with simple user interfaces is vital for challengers to navigate, choose, and track their progress seamlessly. Set up your pricing plans to participate in and re-take the prop challenges, the profit-sharing scheme for successful traders, and the capital provided to prop investors.
6. Prepare a Marketing Strategy
A proprietary trading platform involves fewer marketing expenses than retail brokers because prop firms target a specific market segment. A multi-asset brokerage firm has a broader target market, leading to more:
Social media campaigns
Advertisements
Promotional costs
Prop brokers focus their resources on professional investors, using dedicated channels, such as online communities and referral programs, where professional investors are available. You can include introducing brokers and affiliate marketing strategies to motivate other businesses and institutional investors to refer other traders to your platform in exchange for a commission.
7. Create a Risk Management and Security Strategy
Choose a platform that offers various risk control measures to minimise the impact of prop traders’ risky strategies. These tools also help candidates plan their trading approach accurately and simplify their objective accomplishments.
You can offer a maximum drawdown risk limit, a cash daily risk limit, a cash loss risk limit, and loss-limit orders to avoid exposure to unexpected market movements, especially in highly volatile markets and securities.
8. Ensure Continuous Monitoring and Improvement
Conduct regular internal audits and technical checks to ensure consistent platform performance and avoid service interruptions. This includes rigorous software testing before launching your platform and real-time system monitoring to identify and eliminate anomalies on time.
Use the back-office CRM analytics to improve your service based on customer feedback and preferences to remain competitive.
Get Funded and Start Prop Trading Today
Prop trading firm is short for proprietary trading, which occurs when a firm uses its capital to conduct trades. In prop trading, traders receive a share of the profits they generate while trading the firm's capital. This arrangement allows traders to access substantial capital without risking their own money. In return, the firm gets a reliable, low-risk way to generate returns on its capital.
Most prop trading firms have specific criteria for evaluating traders before they can begin trading with the firm's capital. Once traders prove their skills, they can access the firm's capital to execute their trading strategies with little oversight. As traders become more profitable, they may receive more significant amounts of capital to trade and greater independence.
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