Prop Firms – Friend or Foe?

  • Prop Firms – Friend or Foe?

    Posted by BarX on January 8, 2024 at 1:49 pm

    The meteoric rise in the ‘Prop Firm’ industry has taken the trading community by storm. The demand for this service is clearly high. One of the many reasons traders fail is the lack of capital and the prop firm provides this facility, so yes the prop firm can be your friend.

    However the business model of the Prop Firms vary considerably and the confusion of regulation globally causes huge angst between traders and prop firms. Whilst everyone accepts that they are to pay for the ‘challenge’ to gain entry, the tricky part comes to trading the live account, does your chosen Prop Firm use the B Book or the A book? The B Book means those live trades are not actually entered into the market and as such if the trade makes a profit then the payout is borne by the Prop Firm and the prop firm loses, equally if the trader makes a loos then the Prop Firm has no loss (but also no profit). So many Prop Firms make this their basic business model. To sustain the business the Prop Firm needs to continue to attract new traders to fund the payouts. So the Prop Firm makes a loss when the trader wins and never actually makes a profit on the live account, so the premise of finding great traders does not appear to be the aim of the business.

    However on the other hand if the Prop Firm uses an A book in the live account when the trader makes a profit then the trader is paid out of real profits and the Prop Firm keeps its share and adds to the profit of the live fund. If on the other hand the trader makes a loss then the Prop Firm makes an actual loss. To contain the loss, this is where the Daily Loss Limits and Maximum Drawdowns come in. This is where the Prop Firm has to manage its risk carefully. If the risk is managed successfully then this is a more sustainable business model.

    Which model do you think is more sustainable?

    WiseWill replied 1 month, 1 week ago 2 Members · 1 Reply
  • 1 Reply
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    WiseWill

    Community Trading Group Trader
    January 8, 2024 at 5:00 pm

    Great explanation. If the Prop Firms can rebuild the reputation hit from MyForexFunds and be more transparent they will provide a great service to the retail market. My concern with all the Prop Firms is the sustainability of the business model.

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