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Definition of a prop firm

  #13 (permalink)

North Carolina
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
Posts: 644 since Nov 2011

A prop firm is a firm where the traders trade firm capital. Historically, prop firms had specific selective advantage. Specifically, they had selective advantage over retail traders. Also because they did not answer to outside investors, they could take more risk. The rise of the prop firm was largely as a result of bank regulations, retail day trader restrictions, and the desire for traders to be able to take advantage of a floor atmosphere, capital, and learn from other professional traders.

Today, it is very difficult for prop firms to obtain advantage because there are fewer retail traders and more of the trade is algorithmic. As a result, many prop firms have went to a split model of offering training and trading. Most firms today fall into the categories of market making firms, firms structured more like hedge funds, pay to trade models, etc.

As for whether any specific firm or offer is worthwhile, one would need to analyze the specifics. In a general a "real firm" will offer enough capital to make a living and should be able to demonstrate traders doing that. Most of the futures pay to trade models have not demonstrated that they are doing that.

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