Launching a brokerage firm today comes with different business types and models to make money. You can choose the classic way of discount brokers, which entails executing orders placed by traders.
Additionally, you can explore a range of modern brokerage services that appeal to a whole new category of investors, such as proprietary trading and hedge funds.
Both types capitalise on the rising trends in the brokerage service industry. So, which one shall you choose? A hedge fund or prop firm?
Understanding Prop Trading Firms
Proprietary trading refers to professional traders executing market orders on the brokerage’s behalf and sharing the profits with the firm. However, in order to become an investor at the prop firm, the broker conducts trading challenges, and only those who pass the competition successfully become a proprietary trader.
When investors become prop traders, they can place market orders using the broker’s capital, trading software and technology. This access offers better opportunities to make money and conduct accurate analysis to increase the chances of landing successful trades.
Benefits of Prop Brokers
As a broker, prop trading exposes companies to proficient investors with higher success rates to generate income for the platform. Moreover, the prop challenges work as a marketing material, attracting investors and ensuring only successful traders gain access to the company’s assets.
Brokerage platforms can add prop trading as a separate arm to increase their sources of income, while newly established prop firms can dedicate their resources to capitalise on rising opportunities in this industry.
Understanding Hedge Funds
Hedge funds are financial institutions that leverage significant funds and technologies to take high-risk, high-return market positions. Hedge funds use complex risk management techniques to avoid excessive market exposure. They use hedging and netting to offset their possible losses and turn them into gains.
Hedge funds invest in various instruments and markets, including stocks, commodities, bonds, Forex currencies and cryptocurrencies. This approach enables them to diversify their source of income, accommodate high-net-worth investors’ needs and multiply their returns.
Benefits of Hedge Funds
Hedge funds make money in two ways. First, they execute multi-million worth of market positions and leverage lucrative opportunities to achieve substantial returns. Secondly, they earn commissions and service fees by managing the funds of multinational corporations and wealthy traders.
As a hedge fund broker, you must invest significantly in building your business and have sufficient capital to execute significant market orders. However, you can benefit massively from cooperating with million-dollar companies and blue-chip organisations.
Conclusion
Hedge funds and prop trading firms are two business models for launching a brokerage firm. Choosing between these two approaches depends on your objectives, capital, assets, and target market.
Prop trading entails working with successful investors, which can bring you significant returns, while hedge funds can generate substantial returns from processing high-risk/high-return orders.