What is prop trading? The ultimate guide
Proprietary trading, commonly known as prop trading, has changed from an exclusive Wall Street practice to a global phenomenon accessible to anyone in the world. Let’s explore the industry’s history, how it has democratized trading, and how Confirmo emerged as a key crypto payment platform in the space.
What is prop trading?
It is a business model where a company uses its own money (proprietary funds) to trade for profit. The industry is now skyrocketing because modern prop firms have started enabling people from all around the world to trade with these funds as well. Still, you can’t just sign up and trade using their money – typically, you will first need to successfully complete an initial challenge to prove your trading skills. Once you do, the prop firm may provide you with their own funds to trade at massive leverage. This move has transformed the industry, enabling new sources of income while educating millions of people about capital markets.
The origins of prop trading can be traced back to the mid-20th century, but it gained significant traction during the 1980s. During this time, American financial markets saw great deregulation, particularly with the lifting of the Glass-Steagall Act. This allowed banks to engage in riskier trading activities. Many standalone prop trading firms were formed, using the capital of larger institutions to take positions across many markets.
In the 1990s, electronic trading enabled the rise of algorithmic and high-frequency trading, which became key prop trading strategies. Following the 2008 financial crisis, regulatory reforms such as the Dodd-Frank Act imposed stricter rules on banks, and these reforms led to further growth of independent prop trading firms that were not subject to the same regulations. This is how the current prop trading industry was born.
The modern prop trading revolution
The internet allowed prop trading firms to enable global traders to use the firm’s capital based on demonstrated skill. We are proud to say that the first company to adopt this model was FTMO, a Confirmo client. FTMO was the first to let traders prove their abilities through challenges, providing substantial capital to those who successfully pass them. This approach has democratized access to leveraged trading, opening doors for talented traders regardless of their personal financial situation.
The industry is currently experiencing enormous growth. New firms emerge every day, and as they compete, they offer different incentives to potential traders, and employ latest technological developments such as artificial intelligence and lightning-fast algorithms to predict market trends and automate operations.
How prop trading helps the economy
Prop trading is not just about helping companies and traders make money. Thanks to high-frequency trading and arbitrage activities, prop trading firms play a crucial role in the global economy by increasing market liquidity (providing buy and sell orders across various asset classes) and contributing to price discovery (reducing volatility and helping markets arrive at fair asset valuations), even if some prop trading firms are now required to provide traders with simulated trading environments instead.
Crypto prop trading firms
Cryptocurrencies offer prop trading firms a new tradable asset with very convenient features. Crypto can be traded 24/7 and is highly volatile – this makes it a logical next step for the industry. By entering the crypto market, companies also demonstrate a focus on innovation and offering their clients as many options as possible.
Crypto prop trading firms apply traditional principles to this new asset class and engage in market making and arbitrage across cryptocurrency exchanges. The profit potential can be very attractive, but crypto trading may require a relatively higher degree of technical skill, market understanding, and risk management.
Confirmo and the prop trading ecosystem
Confirmo is a key player in prop trading by providing easy and secure crypto payment solutions. We enable prop trading firms to accept crypto payments for challenges, and to payout thousands of traders simultaneously. Combined with the option to manually deposit fiat for Mass Payouts, we have become integral to the operations of leading prop trading firms.
Why do these companies love crypto? Because it enables fast, efficient, and global transactions. These are key needs in the industry as traders come from every corner of the world. Managing hundreds of fiat currencies, conversions, and the cutthroat fees that international transactions carry is a very difficult business situation. With Confirmo, prop trading companies can leverage the best of crypto by avoiding traditional payment processors and significantly increase their profit margins.
This is why accepting crypto payments with Confirmo a particularly attractive proposition to every growing prop trading firm. Industry leaders such as FTMO, PlexyTrade, Funding Pips, MyFundedFX, The 5ers, Blue Guardian, E8Markets and many more are already enjoying Confirmo’s solutions custom-tailored to their needs.
Conclusion
Prop trading has changed dramatically since its birth in the 1980s. What emerged as a niche bank & Wall Street activity is today a diverse, competitive ecosystem that anyone can participate in from the comfort of their smartphone. As the industry grows and evolves, Confirmo will keep playing a crucial role in providing the financial infrastructure that allows prop trading firms to operate securely, efficiently, and globally.
Prop trading is an interesting opportunity for skilled and aspiring traders alike. However, becoming a successful trader requires continuous learning, discipline, and a deep understanding of both financial markets and the technologies of modern trading practices. The industry is growing fast, and thanks to crypto and Confirmo it can operate simply better than ever before.
