As someone active in the institutional FX and CFDs space, I engage with dozens of industry professionals weekly, a practice spanning years. These conversations naturally revolve around emerging technologies, effective business approaches, marketing tactics, problems, and more. Although the financial markets are incredibly dynamic, I've noticed that certain patterns, challenges, and strategies remain constant.

Trader Funding Firms vs Prop Trading Firms

I've read a few dozen articles on trader funding firms (TTFs), many of which display a noticeable bias. The marketing and management teams of these firms often prioritize company promotion, sometimes at the expense of full transparency or in order to stay clear of regulatory scrutiny. Technology companies are similarly inclined to highlight their products or services. Traders access TTFs from their unique perspective, considering aspects like peer reviews, educational resources, the difficulty of challenges, and the quality of support.

I am employed by a liquidity provider, a position that could suggest a biased viewpoint. However, this isn't the case for me. To be fair, only about 20% of trader funding firms meet the standards required to collaborate with my company, and of these, just 10% have a genuine business need for our services. This reality significantly reduces my chances of gaining clients by overly praising Trader Funding Firms, allowing me to maintain an honest perspective.

Throughout my career, I have extensively engaged with TTFs at various stages of their business development as well as vendors supporting them, though I prefer not to single out any specific firms.

It's important to remember that my experience doesn't cover every firm out there, and my insights are based solely on my personal interactions and observations.

A Risky Model for Traders

The first time I heard about proprietary FX trading was around 14 years ago. My college roommate returned from a job interview, proudly sharing news of starting a new job with significant earning potential.

Intrigued, I wanted to know more about the details. He explained that he needed to open an account with a firm (which I won't name as they are still operational) and deposit $5,000 of his own money. The firm would then match this with an additional $5,000 as part of their investment. His role was to work 9-5 in the office, liaise with a trading mentor, and focus on trading to make money.

I don't recall the specifics about stop losses or overnight positions, but he often spoke about support and resistance and the simplicity of it all. To have the company invest more in his account, he needed to maintain consistent profitability for about three months. At the time, this arrangement seemed odd to me. But, having recently immigrated from abroad, I thought it might be typical in the U.S.

Three months later, my roommate lost $5,000. The firm withdrew their initial $5,000, stating he failed the test and couldn't manage corporate funds. However, they offered him the chance to pay a small desk fee to access the “big institutional market” or to take additional courses to enhance his skills. That was the end of his journey.

Some of these so-called traders/affiliates claim they make $$$ from trading but will partner with a prop firm that have trouble paying traders out.

Guess morals go out the window for a lil monthly check.

Know when to leave people… No amount of money should be worth doing…

— Mona (@Mona_Trades) December 3, 2023

Later, I learned that he had been involved with a Depositary Prop firm or a first loss broker. These U.S. firms are licensed (broker-dealer) and generate revenue through proprietary trading (options, futures, equities), desk fees, marked-up spreads/commissions, and training courses. If a trader incurs losses, it's their own money that's lost first. This setup was seemingly common back then, and more experienced industry veterans might have more to say on this. Nowadays, this model is still functioning in the futures, options, and equities space.

While preparing this series of articles, I decided to include a comparison of various firms considered proprietary. I also aim to clarify why companies running funded trader programs shouldn't be labeled as proprietary, as in reality, very few of them are.

What Is a Proprietary Trading Firm? And What Is NOT.

Trader Funding Firms have been around for decades. I would say their increased popularity began during COVID-19, when more people got involved in the financial markets, leading to their accelerated growth.

What makes these programs so attractive?

a) The idea that a humble, hardworking, and “good” trader without money can start making profits using the capital of “bigger guys” (honestly, this idea will never fade).

b) The ego and recurring thought of “what IF I pass” (a psychological aspect).

c) Everyone loves the “evaluations” for the same reasons people are drawn to horoscopes and magazine quizzes.

d) “Luxury Life” marketing (which could be a separate topic on its own; let's just leave it as it is).

Many people claim that trader funding programs are full-fledged proprietary firms and refer to them as such, but I think that’s somewhat misleading and inaccurate. Yes, they may share some similarities but are not the same. Business models are fundamentally different. Full-fledged Prop Firms are actively trading: they use quants, often act as market makers or liquidity providers, do not collect or rely on evaluation fees, and are regulated.

They may, however, occasionally run trading competitions to recruit students at top universities (Jane Street and their ETC Virtual is a good example). Trader Funding firms may or may not be involved in proprietary trading, but they always collect and rely on evaluation fees.

Trading competitions should be mentioned for clarity. They are completely separate from trader funding programs, but the technology often overlaps.

I would also include “semi-retail” trader funding firms with “questionable practices” as an emerging sub-form. In addition to traditional vanilla Trader Funding programs, they offer Instant Funding. This is a setup where traders pay a small fee upfront to access $10,000+ of capital immediately (I will cover these practices separately).

Returning to the definition of trader funding firms that people mistakenly call “proprietary”: As someone who has spoken to dozens of trader funding firms and their vendors, I can confidently say that the prop trading aspect in 90% of these firms doesn’t take place (particularly for the FX programs; funded programs for options and futures are slightly different). Why, may you ask?

If structured properly, the evaluation fees are sufficient to cover operational costs, technical setups, marketing expenses, and the withdrawals of the small percentage of funded traders, while still maintaining a healthy cash flow.

Plus, since proprietary aspects of the business may or may not take place, and it’s nearly impossible to verify publicly (the irony of the word “proprietary”), I would insist on calling any firm that collects evaluation fees from traders a “trader funding firm.”

Last tweet of the night but important

A prop firm at its core should be a profitable way to monetize data in any way possible. Data monetization can be internally trading, copying, or facilitating 3rd party relationships that can assist with monetization through their own…

— MattL CEO MyFundedFX (@MattLCEO) November 19, 2023

The next article of this series will discuss jurisdictions and the best and worst practices of trader funding firms.

For more in-depth analysis with examples and data, join the waiting list to download Trader Funding Program's 50-page Business Plan.

Disclosure: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of Advanced Markets.