Looking to trade financial markets? How is prop trading different from traditional brokerage accounts? 3 key differences to know before you begin trading.
In the financial markets, proprietary trading (prop trading) and traditional brokerage accounts differ in many ways. Understanding these nuances is crucial for anyone considering a platform like OANDA Prop Trader.
What is proprietary trading?
Prop trading – or to give its full title, proprietary trading – is where a firm such as OANDA invests its own funds for profit rather than using a client’s money. The primary goal is profit – rather than earning a commission from processing trades. The firm earns full profits (and losses) from any trades placed in the market.
OANDA’s approach to proprietary trading opens up this model for external traders to participate. Traders access virtual capital and trade it in real market conditions. OANDA uses this virtual trading to generate trading signals for our proprietary trading models to follow. When a trader’s virtual trades generate positive P&L in the trader’s virtual account, OANDA pays a share of this P&L to the participating trader as a real (not virtual) payout. This is because OANDA’s proprietary trading benefits from accessing these trading signals in our own trading decisions.
Along with the opportunity to earn a profit share, prop traders also typically have access to the firm’s technologies and market data, which can help them navigate the challenges of trading.
Also, read our Labs blog here: An introduction to the essentials of proprietary trading
What is a brokerage account?
A brokerage account is an investment or trading account managed by a licensed brokerage firm. Investors deposit funds into their brokerage account, and the firm handles transactions for investments or trades across various instruments like FX, stocks, bonds, and commodities on their behalf.
The assets within these accounts belong to the traders, who are typically responsible for reporting any income earned from the account on their taxes.
A CFD brokerage account is a trading account managed by a licensed brokerage firm. Self-directed traders deposit their trading capital/ own funds into their brokerage account and trade across various instruments like FX, stocks, bonds, and commodities.
The assets and P&L generated in the accounts belong entirely to the traders, and the brokers' role is to provide the platforms and access to the markets.
| Concept | Forex Proprietary Firm | Forex Broker |
|---|---|---|
| Role | Provide funds for traders | Provide trading platforms and services for traders |
| Funding | Company funds | Traders’ funds |
| Funds threshold | Provide funding programs to lower the funding threshold for individuals | An initial deposit may be required for trading |
| Profit | From profit sharing | From trader’s spread, commission, etc. |
| Risk | The company bears trading risks and losses | Traders bear trading risks and losses |
| Trader’s profits | Profit sharing | Trading profits |
| Trader’s max risk | Loss of entry fee | All trading funds |
| Trader profile | Traders who have technical skills but do not want to use their own capital and have a lower risk tolerance | Traders who have sufficient funds and higher risk tolerance |
Difference # 1: Risk Capital: How are funds involved?
In the OANDA Prop Trader program, we ask potential traders to pay a fee to participate in a two-phase Challenge. When they pass the challenge, they will qualify to trade and receive a real profit share (up to 90%) on the Signal Provider account. In both the Challenge and Signal Provider accounts, traders must adhere to trading rules and meet several objectives.
In contrast, a CFD brokerage requires traders to deposit and risk their own capital. The brokerage acts as an intermediary, executing trades on behalf of clients but does not share in the profits or losses. Here, the trader bears all financial risks and rewards, unlike OANDA's profit-sharing prop trading model.
Difference # 2: Client’s losses are limited to the Challenge fee in Prop Trading
In prop trading, firms allocate a set amount of capital to traders, who then have autonomy over their trading strategies. However, since the firm’s capital is at risk, there are strict risk management measures in place, such as daily loss limits and maximum drawdown. If a trader’s account falls below a certain threshold, their trading privileges will be suspended, and they will need to repurchase a new challenge to participate again. The fee paid to take the challenge is the only cost to the client, and that determines the virtual funds they wish to manage should they pass the challenge.
Prop trading Challenges by OANDA Prop Trader
On the other hand, CFD traditional brokerage accounts operate differently. Traders use their own capital, and while they also employ various strategies, the responsibility for managing risk falls entirely on them. There are no externally imposed drawdown limits or qualification processes. The brokerage facilitates trades and might offer powerful tools but does not intervene in the trader’s strategy or risk management, making the trader fully accountable for any losses or gains.
Difference # 3: Regulatory Scrutiny
By not holding clients' funds, prop trading firms do not currently need to meet regulatory requirements and obligations that CFD brokers must adhere to. However, as the popularity of prop trading grows, there is increasing debate among industry experts about how regulators will respond. While opinions vary on the specifics, it is widely believed that regulatory requirements for prop firms may happen in the future. As a result, it's crucial for prop trading firms to uphold ethical standards, foster mutual respect, and establish transparent, trustworthy relationships with traders from the outset.
Given OANDA’s background of being a highly regulated company for the CFD trading business, we are in a better position to understand the requirements and standards regulators seek.
In the OANDA Prop Trader program, we operate the payouts of successful OANDA Prop Traders from within a regulated entity (OANDA Global Markets), helping us prepare for potential future regulatory involvement.
Why Prop Trading with OANDA Prop Trader?
For traders looking to take advantage of the technological, strategic, and financial resources that prop trading can offer, OANDA Prop Trader provides a compelling opportunity.
OANDA Prop Trader offers traders the opportunity to maximize market potential with the support of a well-capitalized, technologically advanced firm.
OANDA Prop Trader allows traders to fully exploit market opportunities with the backing of a well-capitalised, technologically advanced firm. This platform is designed for skilled traders ready to leverage their expertise in a dynamic and rewarding trading environment.
In contrast, online trading via traditional brokerage accounts remains the preferred choice for individual investors who prioritise control over their investments and like to manage their own risk completely. The decision between these two paths ultimately comes down to your trading philosophy, risk tolerance, and professional ambitions.
In conclusion, while both prop trading and traditional brokerage accounts offer pathways to market participation, they do so in fundamentally different ways. Understanding these differences, especially the more nuanced aspects, is crucial for anyone looking to make informed decisions.
