How To Choose the Best Prop Trading Firm

August 21, 2023


How to choose the best prop trading firm

The vast world of trading is one full of opportunity. Prop trading, in particular, is enjoying growth thanks to retail investors. The field draws in new prop trading firms daily, with even more traders trying their hands at it. This naturally sparks many questions, including how to choose the best prop trading firm.

Many factors come into play when deciding on a prop firm, especially since it’s not a “one size fits all” scenario. Depending on your asset class, level of experience, trading strategy, location, and preferred business model, a prop firm that works great for you might be a poor choice for another trader and vice versa.

At Black Eagle Financial Group, we’re proud to be an established proprietary trading firm that supports traders all over the world. In this guide, we explain what you need to know to choose the best prop trading firm.

What Is a Prop Trading Firm?

A prop firm, otherwise known as a proprietary trading firm, is a company that uses its own capital to make trades and, ultimately, generate profit. The distinguishing characteristic of these companies is that they offer their capital and infrastructure to traders who use their market strategies to create gains by trading the firm’s various assets. Examples of these assets include:

  • Stocks
  • Currencies
  • Options
  • Futures
  • Commodities

Prop trading firms cater primarily to professional traders, differentiating them from retail trading environments. Since prop firms offer up their capital for traders to use, they split some of the profits to varying degrees depending on the commission structure.

Although prop firms typically work with experienced traders with a strong performance history, they also accept new traders and usually offer some training. Coaching methods vary between firms, so it’s essential to research the company and contact management to find out their onboarding process. Doing this will give you an idea of how the firm operates and help determine whether it’s a good fit.

Are Prop Trading Firms Legitimate?

Prop trading firms are generally legitimate. However, some engage in disingenuous practices like bizarre funding options, misleading marketing, and unfair challenges to new traders. This, combined with the lack of government regulation, means choosing a disreputable firm can be risky. 

The vast majority of prop firms conduct business appropriately; just remember to be mindful while researching and consider your needs and the factors below, like business model, capital security, and risk management, when choosing the best prop trading firm for you.

Why Would You Join a Prop Trading Firm?

Joining a prop trading firm can help you forge a successful future in trading. You’ll gain hands-on experience by trading capital across various markets, which will improve your trading and investing capabilities. If you’re already an experienced trader with a proven track record, then a prop trading firm is a fantastic way to increase your capital.

Additional benefits of joining a prop firm include:

  • Access to additional leverage and capital
  • Reduced execution costs
  • Access to advanced routing options
  • Access to advanced trading platforms

When you perform well enough with a prop trading firm by consistently generating profits, they might increase your capital access, allowing you to produce further gains.

Does the Prop Trading Firm Meet Your Basic Requirements?

Before you decide to join a prop trading firm, you’ll want to see if the firm meets your basic requirements as a trader. Some of the questions you’ll want to answer in your quest for the best prop trading firm include:

  • Do their tradable assets align with your preferred asset class?
  • Do they partner with traders in your location?
  • Are they open to your trading strategy or more restrictive?
  • What kind of training and support program do they offer traders?
  • Do they require traders to receive licenses, such as Series 7 or 56?
  • Are they willing to support your preferred trading platform if they don’t already?

If the prop firm you’re currently looking at doesn’t meet your criteria, you’ll probably want to look elsewhere. The good news is that there’s no shortage of prop trading companies, so you’ll eventually find the best prop trading firm for you.

Important Factors To Consider When Choosing a Prop Trading Firm

It’s vital to know what to look out for to separate the average prop firm from the exceptional.

Business Model and Profit Split

A company’s profit split, or profit share, is how traders make money from prop trading firms. This is a part of the company’s business model — how they incentivize traders to join them and generate profit individually and for the firm. The split you get from the profits varies from company to company, reflecting the firm’s business model and the trader’s experience and performance.

High Commission

A high commission model is similar to a brokerage model because it has a complete payout structure. With this model, firms make money on the number of trades you perform instead of how profitable your trades are.

Low Commission

Otherwise known as a profit share model, this is the inverse of the high commission model. You pay a smaller commission, which incentivizes you to make more money so both you and the company turn a profit. The low commission model allows for higher volume strategies to remain profitable without all profits being eliminated by commissions.

Challenge Model

The challenge or combine model is a more recent approach among prop trading firms. As a trader, you must pass a challenge before gaining a live account with access to the firm’s capital. Firms that utilize this model gain more money when traders fail their evaluation process, which some companies take advantage of by setting unrealistic goals for the traders.

Fully Funded Versus First Loss Model

These models aim to allocate capital and mitigate risks during trades.

Fully Funded Model

In the fully funded model, traders receive a certain amount of the firm’s capital to trade. Since the firm is taking on additional risk by fully covering any trading losses, the firm keeps a higher percentage of the profits.

First Loss Model

In first loss models, traders put up some capital that acts as first loss capital against any of the trader’s losses. The company provides leverage depending on the trading party’s experience, track record, and overall risk profile.

Risk Management and Leverage

Prop trading firms allocate their capital to traders, so they must implement risk management to mitigate losses to their capital base. Maintaining asset liquidity is a priority for prop firms. Look for firms that offer increased leverage depending on your experience, relationship with the firm, profitability, and strategy risk profile.

Trust and Capital Security

Choosing a firm that ensures capital security through escrow accounts, flexible payout, and proper capitalization is crucial.

Strategy Specific Factors

Depending on your strategy, some prop trading firms may be too restrictive. Do they charge a high margin interest rate for holding trades overnight? Are there high short carry costs that might outweigh the profits you make on hedges or shorts? 

You’ll also want to factor in how they handle their ETB list, what’s available for HTB stocks, and their routing options. Most firms will accommodate basic routing, but you may require additional options, such as: 

  • Low latency
  • Midpoints
  • DMA options
  • High liquidity capture routes
  • Dark pool aggregators

When selecting a prop trading firm, it’s essential to ensure that their offerings align with your specific trading strategy and requirements, enabling you to maximize your potential in the markets.

Tips To Narrow Down Your Search for a Prop Trading Firm

Although you should consider several factors before choosing the best prop trading firm for you, you can narrow down your search with these recommendations.

Check Feedback From Other Traders and Online Reviews

A firm’s reputation is one of the quickest ways to determine if they’re worth your time. This can inform you of the firm’s reliability, success rate, and track record.

If you’re considering a prop trade firm and want to learn more about them, ask traders associated with the company for more information. Otherwise, online reviews are a great way to gain insight from traders who have experience with the company.

Find Out How Much Autonomy You’ll Have

Rules and regulations vary across prop trading firms, which can complicate your decision-making process while parsing through the many available options. Industry-leading prop trading firms are generally flexible regarding trading rules, meaning you’ll have far more autonomy than a smaller company with restrictions.

Take the time to review each prop trading firm’s policies and rules so you know how much freedom you’ll have beforehand. They might limit your activities to intraday trading or restrict your long-term trade power, such as holding trades over weekends. If freely navigating different markets and experimenting with your trade strategies is important to you, then you’ll want to consider firms that offer you the most flexibility.

Learn About the Support You Can Expect To Receive

Support is crucial to a successful trader and prop trading firm relationship. If you’re new to prop trading, you’ll want to know what training a company offers. These can be educational programs taught by instructors or industry experts.

You may learn about various forms of trading, such as day, swing, and macro, as well as how to distinguish and implement specific strategies, including merger arbitrage, long/short equity, and quantitative.

Even if you’re an experienced trader, you’ll want to know how a firm will support your trading endeavors. Find out what resources are available through the firm, such as whether they offer a dashboard to view valuable statistics and market information, tracking tools for your progress, or a portal providing ongoing education.

See If the Prop Trading Firm Lets You Work Remotely

Say you’re interested in prop trading and discover a company that sounds like the perfect fit for you. However, the firm is on the other side of the country, and moving is out of the question for you. You’ll want to learn if the firm offers remote trading opportunities or if their arrangements are strictly in-office.

Whether you live in the same town, across the country, or in another country, working remotely grants you greater flexibility to trade wherever you might be. However, if you live in a non-US country and are looking at a US-based prop firm, they might not take you on.

Take Your Trading to the Next Level With Black Eagle Financial Group

Are you a new or experienced trader looking to take your trading game to the next level? Black Eagle Financial Group combines a hedge fund, prop trading firm, and financial services company to elevate and support you! We have a proven track record of providing capital and infrastructure to traders backed by professional support, competitive pricing, and capital security.

We direct orders for buying and selling financial instruments with over 130 default routes ranging from DMA to dark pool aggregators, midpoints, and floor brokers to reduce costs and ensure increased profitability. We’re also open to using multiple trading platforms if necessary.

We offer trading on US equities and options markets through Sterling Trading Pro, including remote services to traders throughout the US, Canada, Europe, Asia, Australia, and South America. Our mentorship program connects new traders with experienced professionals who understand making money in the markets.

To find out if we’re the best prop trading firm for you, contact Black Eagle Financial Group toll-free at +1 (833) 253-2453 or email us at [email protected] with any questions or inquiries on how we can improve your trading today.

Share This Post

Get in Touch With Us

If you are interested in working with us or simply learning more, please reach out to us via the contact form below.

Related Posts

Lacus tristique at aliquet massa non. Purus ut velit lacus nam ut amet. Tempus in imperdiet leo.

How to choose the best prop trading firm

August 21, 2023


How To Choose the Best Prop Trading Firm