Tech Vendors Lower Entry Barrier for New Prop Firms, but Conflicts Mount

The prop trading industry has grown rapidly, with new entities appearing frequently. This expansion raises questions about the ease of entry into the market, the integrity of its operations, and the implications of its technological foundations.

The Illusion of Exclusivity

Traditionally, setting up a prop firm was seen as a venture requiring significant capital, trading expertise, and operational efficiency. However, recent trends suggest this perception may not reflect reality. With the support of the right technology vendor, it is now possible to launch a prop firm with a modest investment of around $5,000 and a percentage of the firm's net revenue.

Although, developing in-house prop trading technology is costly, some resourcefull companies already present in the retail trading industry are opting to take the in-house technology route.

“We thoroughly researched various options for technology for our ATFunded project. We concluded it was better to develop in-house rather than use a third-party vendor,” said Siju Daniel, Chief Commercial Officer of ATFX and ATFunded. “This isn’t to downplay the work of third-party vendors, but our project requires flexibility. Vendors have contributed significantly to the space, offering time advantages for new participants.”

However, these costs are not for everyone, especially those starting afresh in the prop trading industry. Most of them usually onboard third-party vendors for their technology needs.

These vendors provide technology that combines expertise and efficiency, offering solutions refined over time to save new entrants from the lengthy and costly process of developing proprietary software. Additionally, leveraging existing tech solutions is far more cost-effective than the substantial expense of hiring and maintaining an in-house development team.

“Launching a prop trading platform can be relatively straightforward if you rely on third-party end-to-end tech providers. These solutions handle most of the heavy lifting, including trader evaluations, risk management, and user interfaces,” said Yavuz Karadeniz, Director of Community Development at E8 Markets, a prop trading platform.

Jon Light, Head of OTC Platform at Devexperts, noted that if a platform is “building the tech from scratch or on top of an existing CRM, it’s a lot of work.”

Technology Vendors: Facilitators or Gatekeepers?

Technology vendors offer various services, from full-service operations that manage an entire prop firm to tech-only solutions with flat monthly fees. Pricing varies significantly, with setups costing between $5,000 plus a 25% share of net revenue and fixed rates exceeding $15,000 with per-user fees. However, this convenience comes with responsibilities.

Given the history of scams in the prop trading space, technology vendors have a responsibility to conduct thorough due diligence, raising the question of whether they should also ensure their clients are legitimate operators. Reports of traders receiving unsolicited services via email highlight potential data privacy breaches, sparking concerns about how prop firms acquire and manage trader data and whether technology providers enforce stringent data protection measures.

Possible Conflict of Interest

The overlap between technology vendors and prop trading firms creates complex issues. When a tech vendor also operates a prop firm, the distinction between service provision and competition may become blurred. This situation challenges industry ethics, fairness, and data integrity. Conflict of interest in the prop trading sector can also arise in areas such as fair use of data, technology sharing, and ethical practices.

The Case of Data Misuse

Data misuse is a major concern, especially in the unregulated prop trading sector.

For example, consider a scenario where a defunct prop firm’s user database is used by another firm for marketing. This not only breaches trust but may violate privacy laws and ethical business practices. However, if used correctly, data in prop trading can bring benefits to prop trading firms.

As Devexperts' Light highlighted: “When tech providers serve multiple prop firms, efficiencies can arise from data sharing, like sharing information about traders. For example, if one trader has been blocked for breaking the rules on one prop firm, their details and IP can be shared across the others”.

The Technology Conundrum

In prop trading, technology isn't just a tool; it's the backbone that supports operations, compliance, and client interactions. When the same technology platform is used across different firms, especially within a network with shared ownership or interest, the integrity of data handling becomes paramount.

Industry actors point out some conflicts that may arise. For instance, the sharing of client databases for marketing purposes without explicit consent risks violating privacy norms. Additionally, a company's ability to leverage its technological infrastructure across various related businesses may create an inherent competitive advantage, potentially distorting the market landscape.

"For the prop trading industry to thrive", one of them says, "technology vendors must enforce clear boundaries. Transparent data usage policies and adherence to laws like GDPR are vital to prevent misuse. Regular independent audits can further ensure tech platforms are not exploited for competitive advantage".