Trader funded firms (TFFs) require a variety of resources to operate efficiently. These resources include administrative back-office, client portal providers, trading platform access, liquidity providers, payment processors and services from know-your-customer firms, among several other services.
Read the previous article on the tech stack of TFFs to know about all third-party parties involved in such operations.
This article will focus on the interconnections between TFFs, retail FX brokers, and liquidity providers as these relationships are crucial to the operations of TFFs.
The Ways to Get a Price Feed
For simulated trading on any trading platform, one needs more than just a platform (over 50 have been used by TFFs). One essential element is a price feed for the selected instruments, FX, Metals, Futures, and more.
Platform providers primarily focus on technology and often don't provide price feeds, sometimes due to legal constraints. Retail FX brokers or liquidity providers come into play here, as both have access to price feeds (executable or not). To be technologically precise, here are the top 2 scenarios of how TFFs obtain their price feeds:
- Trading Platform → API connection (Direct) → Price Feed
- Trading Platform → API connection via 3rd Party (Bridge or Gateway) → Price Feed
If a TFF works directly with a trading platform provider, they must have separate agreements with both the bridge provider (if required by the platform) and the price feed provider.
On the other hand, if a TFF leases a trading platform from retail brokers or third-party consultants, price feeds and bridges are typically provided by them. Retail brokers usually charge less, or even nothing, if they also secure a lead agreement, compared to third-party consultants. I've seen consultants charging as much as $50,000 for basic TFF setups.
Price feed costs can range from free (though there are still questionable methods to obtain free price feeds) to over $20,000 a year.
What is the legality behind the TFF business? How are they regulated? Read the previous article on the jurisdictions where the TFFs are registered.
The Role of Liquidity Providers
Now, let's examine how liquidity providers can potentially work with TFFs.
Similar to retail FX brokers who claim to Straight Through Process clients' orders to third parties, it's legally unverifiable whether a TFF operates a proprietary trading desk behind the scenes. This is why anyone in institutional FX might be skeptical of "prop trading" claims on TFF websites.
Let's assume a TFF runs a proprietary desk, as stated on their website, and provides simulated trading that mimics live trading (though this can't be perfectly replicated even with sophisticated demo setups). Further, assume a trader passes the challenge and is ready to manage real capital and is trusted with TFF funds (I highly doubt one month of positive results can yield a 100k investment).
How Will This Winning Trader Be Connected to the Real Market?
Some TFFs claim to provide a live trading account to successful traders (some actually do), while others suggest the trader continues on a simulated account, with the TFF copying their trades onto an actual prop trading account.
However, for a TFF to be connected to a liquidity provider for prop trading, a more complex technical setup is required. In addition to that, considering the leverage and funding offered, a TFF needs significant cash reserves. On that note, I haven't seen a single proper prop fund trading on 1:100 leverage.
All of the above (complex technical set up, liquidity provisions) create substantial challenges for TFFs, making it nearly impossible to fulfill claims of forwarding funded trader trades to liquidity providers.
Forwarding live trades to retail brokers or hedged flow are more feasible.
How do you distinguish prop-trading model with trader funded model? Read the previous article on separating TFFs marketing gimmicks and reality.
Choosing a Cost-Efficient Model
The TFF business model relies on fees from failed evaluations to cover the costs of rare profitable traders. This isn't inherently good or bad; it's simply the core of the business model.
In summary, TFFs often partner with retail FX brokers (officially or not) to access trading platforms, price feeds, and occasional hedging, as well as separate lead-sharing and marketing agreements. This setup is indeed cost-efficient for TFFs, though fewer retail brokerages are willing to take the risk, opting instead to start their own TFF nowadays.
Liquidity providers are usually involved in two scenarios: with newer, less experienced TFFs needing to hedge rare winning clients or not-netted flow, and with larger, established TFFs that have enough clients and data to run their own proprietary trading. However, from my experience, only a few TFFs fully understand how to leverage the real-time and historical data they access.
If you would like to read more about technology and risk management for TFFs, leave your email on the waiting list to receive a 50-page long business plan.
Disclosure: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of Advanced Markets.
