The Revolution Begins
Most people have heard of proprietary trading, which describes institutions (usually banks and other large financial institutions) that trade securities and other leveraged financial instruments in their own accounts.
Evolution of the Industry
As noted earlier, the proprietary trading space historically belonged to banks and large financial institutions. This implies that it was closed to beginner and retail traders.
Mapping the Ecosystem
The legacy prop trading ecosystem was lean due to the high entry bar. A typical prop trader was an experienced bank employee working at the employer's trading desk.
The Business Model
A prop firm invests directly in financial instruments, such as CFDs on stocks, forex, futures, options, and cryptocurrency. This model is unlike brokers that take clients' funds and trade on their behalf.
Gamechanger for Traders
Prop firms have availed unmatched capital to retail traders. Forex is a highly volatile, and traders with small capitalization accounts cannot survive the wild fluctuations.
The Ugly Side of the Industry
The prop firm ecosystem is not without blemish. Given the low barrier to entry and the availability of many retail traders ready to try their luck in prop trading, the ecosystem has fallen victim to some bad actors.
Challenges and Hurdles
Prop firms face various challenges when implementing the business model. First, the absence of definitive laws to guide operations in the industry leaves firms at the mercy of greedy authorities.
The Future of Prop Firms
Prop firms have achieved huge milestones, far better than legacy proprietary trading businesses like banks. Most notably, they have lowered entry barriers for new prop firms and retail traders.
The anticipated volatility also presents a challenge. According to the report, 73% of the surveyed firms expect their future performance to be significantly influenced by the volatility stemming from economic and geopolitical turmoil.
Prop trading as we know it today has grown in leaps and bounds over decades. However, it became more fashionable post-2012 after banks' proprietary trading activities were curtailed by Basel 2 and the Volcker Rule regulations.
How FX2 Built the Next-gen Prop Firm
FX2 Funding is addressing the major issues of the industry and providing a service that puts Trader First.