Choosing a suitable business model to enter the financial trading industry is the most important step to launching a brokerage platform. This space has expanded massively over the years, and with more technologies emerging, there are various ways to enter the market.
Today, we will talk about two unconventional brokerage strategies that go beyond the mere trading order execution that discount brokers do. Proprietary trading brokers and hedge funds are two ways to make money from the rich money pool and capitalise on growing opportunities.
Hedge Fund Explained
Hedge funds are large corporations that engage in risky trading strategies to achieve significant gains. They use a high-risk/high-return investment method while hedging their positions to avoid excessive losses from unpredictable price action.
Setting up a hedge fund company requires substantial investment, including operational capital, advanced technology, deep market access, and advanced trading models that retail brokers do not implement.
Hedge funds offer their services to large corporations and manage accounts with millions of dollars to invest them in various asset classes and instruments and grow their wealth.
Therefore, if you are looking to have your own hedge fund, you need to build strong relationships with tier-1 banks, financial institutions, blue-chip companies and multinational corporations and trade with their money wisely.
How Hedge Funds Make Money?
Hedge funds manage million-dollar worth of investments. This means they benefit massively from commission fees charges on bid-ask spreads, deposit and withdrawal fees, and shares on winning positions.
Moreover, they can offer additional services like financial advisory, personal management, and custodial services, which secure more income sources.
Prop Trading Explained
Prop trading means executing market orders on behalf of the company, which refers to brokerage firms attracting seasoned investors to trade for them and share the profits together.
Proprietary trading firms offer prop challenges, like reaching trading objectives, achieving specific returns, and flipping an investment portfolio with a given rate of return. Once a candidate trader passes the challenges, they gain access to the broker’s facility, including capital, technology, software and assets.
This approach eliminates the need for heavy advertising because the challenges can sufficiently attract investors who are looking to trade and grow their portfolios using the brokerage’s resources.
How Prop Firms Make Money?
Prop trading firms make money by sharing the trading profits that investors achieve during the challenges. They also get a cut from the trading returns when the trader uses in-house resources but with a different commission rate.
This method ensures that only successful and experienced traders work for the company, offering a win-win scenario for the broker and the prop trader.
Another way to earn as a prop firm is by setting entry fees to challenges. Keep in mind that you can attract hundreds or thousands of traders to enter the competition and re-take them if they fail to achieve the objectives. This opens more sources for earning for your prop firm.
Conclusion
Prop trading firms and hedge funds are two brokerage models that have proven successful in the brokerage service industry. Each has different prospects and challenges.
A hedge fund requires significant investment to start and maintain activities so that you can attract wealthy investors. On the other hand, prop trading attracts professional investors to trade for you and share the profits with them.
