When it comes to the prop trading business, it hasn’t exactly been an easy couple of years.
Starting with a boom a couple of years back, prop trading companies quickly faced uncertainty and complications caused by the ambiguous nature of their business model. Regulators didn’t know what box to put them in, and technology providers were extra cautious and would abruptly refuse their services, causing the company to crumble.
There are also all the standard business risks that every company dealing with trading and investment faces. The industry’s entry barrier continues to grow, and success is not guaranteed.
Just recently, another prop trading firm collapsed after only a few days of operations, sparking memes and jokes in the community. This article is partially inspired by the LinkedIn post by James Glyde, the CEO of PipFarm, who gave an empathetic and insightful commentary on the situation.
Meticulous preparation is not enough
Any business, especially brokerages, hedge funds, and prop trading firms, can spend months and hundreds of thousands of dollars developing elaborate business plans and arranging creative marketing campaigns only to fail shortly after the launch.
You can lose everything almost instantly without a solid foundation, reliable technology, and a strong risk management strategy behind your prop trading business.
4 ways prop trading companies can secure their future
A successful launch is important, but it’s not everything. Prop trading companies that want to exist for years and be successful need to be resilient enough to deal with constant changes and risks, many of which come from malicious trading practices, infrastructure vulnerabilities, and other unfortunate events prop trading businesses deal with all the time.
Here are four factors that everyone in the prop trading world needs to consider for 2025 and beyond.
Ultra-low latency pricing & execution engine
A powerful liquidity bridging and margin engine is a must to protect your business from latency arbitrage abusers. These abusers usually use faster technology and price feeds to “predict” sharp market movements and take advantage of even a few milliseconds of latency, which you might have with technology built years ago using outdated tech stacks.
Advanced risk-management system
Risk management is paramount to detecting toxic activity in your trading environment, alerting you, and even automatically hedging your risks.
Automated draw-down control system
This system will monitor your prop traders’ activity and control their performance, taking every tick into consideration.
24/7 automated monitoring & backup system
24/7 tracking is non-negotiable. It will keep you alert and safe if anything goes wrong. Even if your main liquidity and pricing provider is down due to some network outage, our technology can automatically switch your price feed to a backup source in seconds.
Final thoughts
Launching a business is always a bit of a gamble. You can shift the odds in your favour by planning, preparing, analysing, and implementing the latest technology. Still, even then, you’re not safe from unexpected surprises.
This is not to say it’s too complex, so you shouldn’t even bother.. However, when planning and calculating, it’s best to be over prepared as the risks and uncertainties you plan sometimes come at a larger scale than expected.
For example, the company that collapsed and inspired this post could have negotiated less aggressive growth targets with investors and allowed more time to pass before it showed profitability. Also, having a reliable partner with market experience is a huge advantage.
At TFB, we constantly talk with aspiring brokers, hedge fund managers, and prop trading companies. Whenever possible, we gladly share advice and tips from our experience to help clients avoid common pitfalls. Someone like that can make the difference between long-term success and a quick downfall.
If you’d like to learn more about what we do and how we can help your prop trading business flourish, email us at sales@t4b.com today.
