Prop Firm 交易考試新手指南

[Analysis] Do Prop Firms Have a Future? Is Regulation Finally Coming?

What Are Prop Firms? How Do They Operate?

Prop firms, short for "Proprietary Trading Firms," are also known as "prop trading companies" or "prop shops."

Traditionally, prop trading referred to the proprietary trading departments of securities firms, using the company's own funds for securities investments. This was within the financial sector and didn't provide services to retail investors.

The "Prop Firms" we're discussing are a type of financial technology service aimed at the retail trading market (B2C), catering to individual investors. They can be understood as emerging prop trading entities.

These firms offer traders the right to operate "virtual trading accounts." Traders can manage these accounts according to the firm's rules, and upon passing, they qualify for profit-sharing accounts.

This service is based on each Prop Firm's own system setup, depending on their operational resources and capabilities. Of course, Prop Firms need to constantly track each trader's trading status.

In simple terms, it's a type of fund-providing service with qualification thresholds. Passing the qualification under the rules provides an opportunity to obtain a profit-sharing account.

How Do Prop Firms Make Money?

Many wonder how Prop Firms profit. It's simple – they collect registration fees. These fees are paid by aspiring participants who want to take on the challenge, similar to an entrance ticket.

Since Prop Firm clients are often global, it's a potentially lucrative market from a business perspective. However, this also leads to fierce industry competition, often resulting in price wars and promotional offers.

Some firms consistently adhere to the essence of operating a Prop Firm, offering fewer discounts and avoiding price wars, but these are in the minority.

Regardless, registration fees are the main source of profit. They understand that most traders won't pass the qualification, and even those who do may violate rules and lose their profit-sharing accounts, making this "trading exam model" profitable.

Besides registration fees, some prop firms also select a small number of successful accounts as signal sources, using these to operate their own funds – a lesser-known profit method for prop firms.

Differences Between Prop Firms and Brokers

As mentioned earlier, prop firms offer traders the right to "virtual trading accounts," which differ from brokers' "demo accounts." Demo accounts have no rules and are merely for practice trading.

Virtual trading accounts have a set of rules and a fund-providing mechanism. If traders meet the targets, they can obtain profit-sharing accounts. As long as traders continue to profit, they can withdraw profits from these accounts based on each prop firm's profit-sharing ratio.

Brokers accept deposits from investors, who use their own funds in accounts opened with the broker. The account's risks and profits/losses are borne by the investor.

Prop firms don't accept deposits. Traders participate in qualifications, and upon passing, they operate profit-sharing accounts. The firm bears the account's risk and losses, while profits are shared according to the agreed ratio.

What Types of Prop Firms Are There?

Prop firms cover various parts of the world, with currently known data showing over 100+ firms, and this doesn't even include the "usable" prop firms.

Prop firms around the world are composed of different "types," including:

  • Established by groups of traders
  • Founded by successful individual traders
  • Created by entrepreneurs with trading experience
  • Brokers expanding their business (possibly a future trend)

Several factors determine whether a prop firm can have a good start:

  • The founder's initial intention
  • Whether it's profit-oriented or trader-oriented
  • The system used to build the prop firm
  • Website platform user-friendliness
  • Richness of official website information or language options
  • Reasonableness of challenge rules and registration fees

The key factor is "whether it's profit-oriented or trader-oriented," which determines the future direction of the prop firm and establishes whether it will adopt trader-friendly or firm-friendly solutions when problems arise in the future.

Prop firms also have some categories:

  • Different main product categories, e.g., Forex Prop Firms, Futures Prop Firms
  • Supported languages or language (customer service team)
  • Countries where services are provided or restricted

Prop firms also need to design products or promote to the market:

  • How to design challenge rules?
  • How to execute marketing aspects?
  • How to set reasonable prices?
  • How to connect services with partners?

etc.

For traders, choosing a prop firm is relatively straightforward:

Aspects to consider include:

  • Service areas (some regions don't accept client registrations)
  • Establishment
  • Withdrawal records
  • Challenge rules (profit targets, maximum drawdown, drawdown method, other restrictions)
  • Reasonable challenge fees 
  • Profit split ratio
  • Methods for expanding account size
  • Suitable trading styles (e.g., scalping, intraday, swing)
  • Future regulation (currently no regulatory bodies oversee prop firms)

Aspects not to worry about:

  • Whether there are challenge fee discounts (nice to have, but not essential) 
  • Whether the prop firm was founded by successful traders

Aspects to be cautious about:

  • Frequent marketing campaigns or extremely discounted offers
  • Prop firms with poor withdrawal records
  • Using the same system as prop firms with poor records

These aspects serve as a "filter," narrowing down the 40+ prop firms currently available. The remaining ones still need constant tracking, and traders should research or be vigilant when using them.

This is also because there's currently no regulation managing prop firms, so risks are borne by the trader, and they need to do their due diligence.

Are Prop Firms Regulated? Are They Scams?

Prop firms are not scams; profit sharing can indeed be received. However, regrettably, there's currently no regulation.

While not scams, there are many fraudulent websites or impersonation services, so the issue of "authenticity" is implicit.

If a trader finally chooses a prop firm from the many options, they must verify if the website is genuine. If unsure how to judge, they can inquire through our customer service via internal messages or choose the prop firm's official website link. We regularly check the validity and authenticity of prop firm links.

Besides authenticity, there are still non-systematic risks, such as sudden regulation.

In 2023, a well-known prop firm became popular in the Prop Firm world or among those interested in Funded Traders in a short time due to its competitive rules, reasonable prices, and good withdrawal records.

Suddenly, the website closed overnight, shocking many traders who were in the challenge or already Funded Traders, and it was a big impact on the entire Prop Firm industry.

However, the issue of regulation had been rumored since around August 2023.

On August 23, 2023, the U.S. Securities and Exchange Commission (SEC) passed an amendment expanding the Financial Industry Regulatory Authority's (FINRA) regulatory scope over proprietary trading firms. An estimated 64 companies would be affected by this amendment, and these companies were not FINRA members.

It's clear that regulation is a future trend, and currently, only the U.S. and Canadian regions have taken regulatory action, but there are no clear regulations yet. Therefore, when choosing a prop firm, prioritizing those with high credibility is advisable.

2024 should continue the 2023 amendment, requiring existing non-broker system prop firms to join FINRA for regulation. This trend should provide more protection for the overall industry and traders.

Read More:ESMA Regulator on Prop Firms: Preliminary Review of Potential New Rules

How Should Traders Approach Prop Firms?

As traders, they face risk management daily, but the overall industry risk of prop firms might not be their expertise. However, their risk awareness in the market can still apply to examining the overall industry.

Traders can prepare themselves according to the following order of priorities:

1.Review needs

2.Do homework

3.Withdraw to break even

4.Copy trading

5.Keep trying

1.Review needs

Traders don't start by choosing prop firms or participating in challenge qualifications. If their trading strategy still can't make them profitable, they'll only waste money on registration fees.

Therefore, it's recommended that traders wait until they're sure they can profit before spending money on challenges. Challenge fees also vary depending on the registered account size, and a prop firm may offer different challenge modes, with different modes across different prop firms.

2.Do homework

Different prop firms have different rules, challenge fees, maximum drawdowns, daily drawdowns, drawdown types, news trading, overnight positions, weekend positions, methods for expanding account size, profit-sharing ratios, and other rules or restrictions.

Any information provided on the prop firm's website can be automatically presumed to be important and not to be overlooked.

Additionally, some prop firms have so-called "hidden rules." It's best to avoid these prop firms as much as possible. Not only are these rules hard to discover, but prop firms with hidden rules have impure motives, and traders might be accused of unwarranted violations.

This is a recurring problem in an unregulated industry and something traders need to be extra cautious about.

3.Withdraw to break even

After choosing a prop firm and successfully passing the challenge, most prop firms will refund the registration fee and the first profit share. After passing, it's recommended that traders withdraw as soon as they reach the minimum withdrawal threshold to recover costs. Subsequent profit-sharing accounts will then operate at no cost, which is more favorable for both mindset and trading.

4.Copy trading

There are already some software in the market that provide connections between different trading accounts, allowing traders to synchronize orders across different accounts.

When combined with profit-sharing account operations, there's typically a real account (Broker) operating with own funds and a profit-sharing account (Prop Firm) operating with profit-sharing account funds.

Whether copy trading can be implemented depends on whether the third-party software supports the Prop Firm to be connected. Additionally, some Prop Firms explicitly prohibit copy trading.

However, most can use copy trading software to reduce the complexity of order placement. As traders continue to qualify for profit-sharing accounts, they will use copy trading to manage a large number of profit-sharing accounts, achieving synchronized order placement.

5.Keep trying

As there's currently no regulation, the overall industry risk remains, and traders should diversify their risks.

The risk diversification referred to here is to avoid losing the "profit-sharing account" due to non-systematic risks of a single prop firm.

Therefore, traders aspiring to become or already Funded Traders can consider qualifying for profit-sharing accounts with different prop firms to mitigate this risk.

Our site includes many prop firms worldwide, including those focusing on forex and futures.

Traders aspiring to become Funded Traders can use the information provided on our site to find suitable Prop Firms: Prop Firm List

Repeat these five points cyclically until no longer reliant on prop firm funds, with the goal of operating with own funds.

Prop Firm Overview

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