Proprietary trading is an important subset of global market activity. Prop firms allow traders to gain funding and increase the buying power of their accounts to boost profits and gradually scale up over time, states Konstantin Rabin of LearnFX.

While prop trading may constitute only a small fraction of the global trading volume, it is nonetheless an important part of the liquidity created in the financial ecosystem.

Prop trading firms offer clients the ability to gain funding and trade with funded accounts. The amount of funding may vary between prop firms but generally ranges from $10,000 to as much as $1 million.

Therefore, the effect on market liquidity from prop trading can also vary depending on the number of funded traders at specific prop trading firms and the amount of funding they have direct access to.

To understand how a particular prop trading firm’s activity increases liquidity on the market, you can view the best and most popular prop firms by country on firmfunded.

Factors Affecting Market Liquidity

Before delivering deeper into the effects of prop trading on market liquidity, it is important to briefly overview the core factors that create liquidity on the market as a whole.

Some notable such factors include:

  1. Market makers and intermediaries, such as banks and brokerage firms, facilitate trading and grant access to market participants, which includes retail traders/investors
  2. The cumulative quantity of buy and sell orders, or depth of market. A deep market has a substantial number of orders at various price points, providing market participants with the confidence that they can execute trades at competitive prices without causing significant price movements
  3. A diverse participation base, which includes retail and institutional investors, hedge funds, prop trading firms, and more
  4. Transparent and readily available information that increases market confidence and facilitates informed decision-making
  5. Efficient market infrastructure, such as trading platforms, order matching systems, communication networks, and more.

Prop Trading and Market Liquidity Example

To better illustrate how prop trading affects market liquidity, let’s look at an example of Prop Firm XYZ. Suppose the firm offers four funding levels, which can be broken down as follows:

  1. $10,000 accounts - 5,000 active clients
  2. $50,000 accounts - 1,000 active clients
  3. $100,000 accounts - 500 active clients
  4. $250,000 accounts - 200 active clients

This amounts to a cumulative funding of $200 million. If we assume that each trader rolls over their account balance at least once a month, this means that the prop firm in question adds a minimum of $200 million in liquidity to the market on each side of the order or $400 million in total.

While this may be a simplified example, it does illustrate the scale at which prop trading firms may affect the liquidity of the market as a whole. Numerous active prop trading firms operate around the world and their cumulative trading volume reaches billions of dollars annually.

However, the global financial markets process trillions of dollars in transactions every day, which makes the effect of prop trading seem negligible.

Overall, while not entirely significant and market-changing, prop trading does have a positive effect on the global financial ecosystem by adding liquidity and allowing traders to access more funds to transact with.

Arriving at a correct prop trading statistic can prove challenging, as prop trading is generally subject to less regulatory oversight and is therefore less transparent. However, it is safe to assume that some of the largest prop firms in the world that have access to over 100 countries around the world do indeed direct a significant amount of capital towards the global markets and this is especially true for derivatives, such as CFDs and futures.

By Konstantin Rabin, a chief editor at website