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How Does Liquidity Work for Prop Trading Firms?

As the online FX & crypto trading industry matures, a recent spin-off from the traditional brokerage model has emerged, known most commonly as prop or proprietary trading.

One of the biggest challenges with this new business model centers around terminology. Concepts that industry veterans have come to understand have been hijacked, innocuously of course, by the prop trading model. This often leads to unnecessary confusion as people find that they are talking over each other in an effort to understand how the prop model works. Case and point is the subject of liquidity.

Let’s Start With Definitions

Before we discuss liquidity, it would help to briefly understand what this new “prop trading” model is all about. In essence, a prop firm offers traders the ability to participate in various “challenges,” essentially trading contests. The participants don’t actually put in their own funds in, rather they pay an entry fee for a chance to win the challenge. Upon paying the fee, they are given a demo account with virtual money that will be used to participate in the contest. Those with a successful track record are then given the chance to be “funded” whereby they can earn money from positive demo trading.

Liquidity in the Prop Trading World

Now with this backdrop, you may ask yourself, how does liquidity fit into all of this? In the world of prop trading, the concept of liquidity is often used to refer to the virtual money that traders are given and the potential “funding” of profitable traders.

As this prop model has emerged, firms have begun offering white label services whereby they offer the entire package to a prospective client, which is normally an affiliate. In this case, liquidity refers to prize payouts and the virtual money being traded. So when a prop client asks about liquidity, in the most basic sense they are referring to a complete “plug and play” package whereby someone can easily refer contest participants over to a ready made contest.

Those in the FX world know that this understanding of liquidity is a far cry from how liquidity actually functions in the real world of FX trading. Nevertheless, it is important to understand how this concept is used as it often leads to confusion on both sides of the spectrum.

Finally, the emergence of this new prop model has invigorated the traditional understanding of prop firms as we have noticed requests for such set ups have increased in the past year. For this reason it is important not only to understand who you are talking to but what type of business model they wish to operate under. The new understanding of the prop model is as close to real life trading as playing football on a PS4 is to actually being on the pitch. 

Atomiq Consulting & FDCTech

Atomiq Consulting has partnered with FDCTech to offer prop firms, traditional brokers, and hedge funds access to cutting edge trading technology. Not only do we have a complete software suite for launching a prop firm we can also assist your start up in launching a forex & CFD brokerage from scratch.

To book a demo of either software, don’t hesitate to contact us.

Have a look at some of the additional services our clients have found to be helpful in the growth of their business.



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