The four types of prop trading firms

Key takeaways

• Independent prop trading firms use their own capital and offer flexibility in choosing trading strategies.

• Bank prop trading desks provide more stable conditions for traders but require higher qualification and experience requirements.

• Broker-dealer prop trading desks include various types of firms and are subject to prop trading regulations.

• Market-making firms Market trade to provide liquidity and may have restrictions on trading strategies, but have access to sophisticated technology.

The four types of prop trading firms

Prop trading firms come in a variety of forms, each with its own unique characteristics and strategies. These include:

• Independent prop trading firms

• Bank prop trading desks

• Broker-dealer prop trading desks

• Market-making firms

All of these types of prop trading firms have different strategies and approaches to trading, which should be studied carefully. Likewise, all of these can cater to different traders, so while one type may be a great fit for you, another might not.

Learn in detail how the business of proprietary trading companies works in the article: Proprietary Trading Explained

Independent prop trading firms

Although they offer more flexible terms, independent prop trading firms can also be riskier, as traders are solely responsible for their losses. These firms use their own capital to trade on various financial markets, often employing a variety of prop trading strategies.

These strategies can range from high-risk, high-reward directional trades to more conservative, income-producing strategies.

Independent prop traders typically have the freedom to choose their own strategies and the ability to move in and out of markets quickly. However, they also face the challenge of managing their own risk and capital.

As such, independent prop trading firms require a higher level of skill, knowledge and discipline to succeed.

Examples of independent prop trading firms include TopStepTrader, The 5%ers and Earn2Trade.

Learn about the features and conditions of funded accounts provided by various companies in the article: Prop Trading Accounts Compared

Bank prop trading desks

Bank proprietary trading desks hold a unique position in the financial world. These are specialized units within banks that are dedicated to trading on the financial markets, but not for their clients. Instead, they utilize the bank's own capital to take positions and make investments, aiming to generate direct profit for the institution.

Banks with prop trading departments often provide a more stable atmosphere for their traders. This stability emanates from the extensive resources and backing of large financial institutions.

However, this stability often comes with its own set of challenges. The competition within these units can be intense. Traders are usually expected to meet higher standards in terms of qualifications and experience. The screening process is rigorous, often only allowing those with a proven track record and elite skills to be a part of the team.

Prominent examples of banks that have or had prop trading desks include global giants like Goldman Sachs, Morgan Stanley, and JPMorgan Chase. These institutions are renowned for their prowess in the financial markets and have been known to attract some of the brightest minds in the trading world to their prop desks.

While the allure of working for such esteemed entities is undeniable, traders must be prepared for the high-pressure environment that often accompanies such prestige.

Broker-dealer prop trading desks

In addition to bank prop trading desks, broker-dealers also have their own prop trading desks that employ four distinct types of trading firms.

These include corporate prop trading firms, proprietary trading firms, hedge funds, and high-frequency trading firms.

• 1

  Corporate prop trading firms trade on behalf of a company and are subject to the same prop trading regulations as banks.

• 2

  Proprietary trading firms, also known as prop shops, are private companies that trade for their own account and are not subject to the same regulations as broker-dealers.

• 3

  Hedge funds are investment vehicles that use a variety of investment strategies, including prop trading.

• 4

  Finally, high-frequency trading firms use automated trading algorithms to rapidly execute trades.

All four types of prop trading firms have their own benefits and drawbacks, and it is important to understand the differences between them.

Market-making firms

Building on the four distinct types of prop trading firms discussed before, market-making firms are a type of those that trade on financial markets on their own behalf to provide liquidity for their clients.

They typically offer a higher level of support and training for their traders, but may be more restrictive of the strategies traders can use. Examples include CME Group, ICE Futures Europe, and Nasdaq.

Role of technology is key in market-making, as firms use automated algorithms to determine the best prices and quickly fill orders. This helps them to provide liquidity and capture profits quickly, without the need for human intervention. Additionally, market-making firms often have access to more sophisticated technology than other prop trading firms.

Best Prop trading firms

1

9.4/10

Go to broker

Your capital is at risk.

Minimum deposit:

$1

Review

Topstep is a leading proprietary trading firm offering traders the opportunity to trade futures contracts. With a unique two-step evaluation process, traders can prove their skills on a simulated account before potentially receiving funding for live trading.
Topstep offers three account sizes: $50,000, $100,000, and $150,000. Regular pricing starts from $165/month, with frequent discounts available. Traders can leverage up to 1:100 and access diverse futures markets, including stocks, commodities, crypto, bonds, and metals. Commissions and fees charged on the Trading Combine (simulation account) align with those on a live funded account, helping traders develop skills for real markets.
Topstep supports traders with educational resources, including free group coaching, to enhance their chances of success.

Pros/Cons

•Real trading accounts are financed by a broker, there is no need to invest your funds in trading.

•The company provides a wide range of free training materials, including free group coaching.

•You can contact the support team using several convenient methods.

•The broker offers a referral program for extra income.

•The company doesn’t offer bonuses, automated trading, or other passive income options.

•The support service works only on weekdays during set hours.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

€155

Review

FTMO is a prop trading firm offering experienced traders the chance to manage a funded account of up to $200,000 with a wide range of instruments including Forex, stocks, indices, commodities, and cryptocurrencies. To qualify, traders must pass a two-step evaluation process.
Beginners may start with a Free Trial account which has the same trading conditions as the challenge ones. Long-term traders are free to use a Swing Account that has no restrictions on holding positions over the weekend or trading during macroeconomic releases. The company offers trading with the most popular platforms – MT 4/5, cTrader, and DXtrade. The leverage is up to 1:100.
Additionally, FTMO is recognized for its educational resources and continuous support.

Pros/Cons

•Quite low testing cost is €155.

•Classic platforms such as MT4, MT5, and Ctrader are familiar to many traders. For these platforms, hundreds of indicators, scripts, and advisers have been developed.

•The starting reward is 80%.

•Diversification of tariff plans. Candidates can choose a demo deposit from 10 thousand to 200 thousand US dollars. There are tariff plans that span from standard to aggressive trading.

•Leverage is up to 1:100.

•Strict requirements for the test period. The allowable maximum loss is 10% of the deposit amount. The target profit is 10%, for which 1 month is provided.

•There is no information about how the company is funded.

Study Review

Who are the different types of prop trading firms suitable for?

Identifying which type of prop trading firm is most suitable for traders requires an understanding of each firm’s unique characteristics.

The table below provides an overview of what type of firm is best depending on the type of trader you are:

Learn about the benefits of prop trading in article: Is prop trading a good career?