Chapter 3

The legacy prop trading ecosystem was relatively small due to the high entry bar. A typical prop trader was an experienced bank employee working at the employer's trading desk. However, this changed drastically once the business was opened to retail traders through specialized prop firms.

Proprietary trading is also historically a desk job at the bank's (or large financial institution's) trading desk. Prop traders also received low payouts – they were mostly salaried employees whose monthly payout did not correspond with the earnings they generated for the employer.

The current prop trading ecosystem includes close to a hundred prop firms with different models tailored to retain traders. Most prop firms in the current market focus on foreign exchange (forex) trading. For example, Audacity Capital promises retail traders the ability to scale up to a half million USD in real money per account for trading forex. Other prominent prop firms like FTMO and FX2 Funding pursue a similar business model with the possibility to scale up the account to the millions.

The prop firms engage hundreds of retail traders to operate funded accounts. Usually, the prop firms engage retail traders (some ask for some months of experience while others offer to train absolute beginners) to apply their strategies to live accounts. Others merely mirror the strategies of successful traders without giving them direct access to real money. Some traders are hired precisely for specific skills, such as copy trading, scalping, or day trading. Firms may also hire EA script writers to augment traders' strategies.

Brokers are another key pillar of the industry. Without them, prop firms cannot perform financial transactions at the scale they do. A broker connects prop traders – through prop firms – to the vast global financial market. It provides access to many financial instruments, such as forex, shares, futures, commodities, indices, crypto-currencies and options. For example, FX2 Funding connects to the market through Eightcap. Eightcap enables FX2 Funding to conduct large, long-term financial transactions at scale.

As part of the onboarding process, prop firms evaluate traders to ensure they meet specific minimums. Most prop firms have straightforward evaluation processes divided into four steps. A typical evaluation looks like this: the prospective prop trader (i) chooses the account size, then (ii) trades at their own pace and style, (iii) demonstrates a 10% gain without violating specified trading rules, and (iv) receives approval for a funded live account.

The evaluation process requires prop firms to obtain specific metrics along the way, which is where white-label software comes in. Many software-as-a-service (SaaS) businesses develop white-label software whose rights they lease out to prop firms – prop firms may purchase the rights or acquire them for an agreed-upon subscription term. The software is especially crucial in the evaluation process where they deploy specialized algorithms to test traders and display relevant metrics for further inspection.

Although the prop trading space as we know it has existed for more than a decade, not enough people have sufficient knowledge of it. That is why most prop firms rely on influencers to enlighten the masses in exchange for affiliate commissions. For most prop firms, the affiliate program is a partnership where affiliates can earn up to 20% of the revenue for referring retail traders. Primarily, influencers help traders, especially beginner traders, to understand the nuanced differences between the different prop firms' programs.

The last significant aspect of the prop trading ecosystem is social media communities on various platforms. There are active groups on Facebook, Telegram, and Discord discussing strategies, trading rules, benefits, and the downsides of prop firms. Additionally, forums like Reddit, EliteTrader and ForexFactory enlighten members on key trends in the ecosystem. For example, this discussion thread on ForexFactory tracks prop firm activity in the space. Although incomplete, it gives readers an idea of the ecosystem in terms of participation and competition.