At the vibrant iFX EXPO LATAM 2024 in Mexico City, FinanceFeeds had the privilege of attending and covering this landmark event, the first of its kind in the Latin American region.
The event brought together industry participants from both the buy-side, and sell-side, vendors, and regulators, and featured a diverse array of panels and discussions, addressing topics such as the future of trading technology, regulatory challenges, and emerging market trends.
Networking, as always, is a big thing at iFX EXPO events and this time was no different. Among the distinguished participants was Justin Hertzberg, CEO of FPFX Tech, a company leading the way when it comes to platforms and tools for proprietary trading firms, helping them optimize performance, mitigate risks, and combat fraud.
Before leading FPFX Tech, Justin Hertzberg had an extensive career in the financial services industry, particularly in brokerage, having led CFTC-registered and NFA member Forest Park FX as CEO and President for nearly 11 years. His background provided him with valuable insights into the operations and challenges of traditional trading models, which he later leveraged to innovate and lead in the proprietary trading technology sector with FPFX Tech.
FinanceFeeds had the opportunity to interview Justin Hertzberg about the rise of proprietary trading, the unique challenges it faces, FPFX Tech’s offering, and the FX industry in the LATAM region.
The Rise of Prop Trading
Justin Hertzberg highlighted that prop trading has gained popularity because it aligns with the current desires of retail traders who seek greater control over their financial future. Unlike traditional investments managed by third parties, prop trading allows individuals to leverage a small amount of capital to access larger funds, providing an attractive option for those confident in their trading abilities. This model offers a lower barrier to entry compared to self-funded brokerage accounts.
“I think it’s really tapping into the needs and desires of traders. Right now, if you look at retail traders, in general, they’re looking to take more control over their own financial destiny than in prior generations where people are investing in their own retirement funds. And they’re not relying on third-party money managers anymore. They like controlling the direction of their life and investments. They want to have that ability to guide it. And I think what prop trading offers, more than what a self-funded account would have in the traditional brokerage sense, is that for a smaller amount of capital,l if you really believe in yourself, if you believe that you are an above-average trader, and can do this for a living, prop trading offers you the ability to access more capital than you could ever command with your own self-funded account. And I think that’s a big draw.”
Hertzberg noted that many traders have an inflated sense of their own abilities, similar to how most people consider themselves above-average drivers. This overconfidence drives interest in prop trading, as people believe they can trade effectively and succeed.
“The sense of ego that people have about their own abilities is also driving that as well. If you asked 100 people if they’re an above-average driver, 80 of them would say yes, for sure. But obviously, that’s not the case. And the same is true here. But people do have an overinflated belief in their ability to trade effectively. And that’s also contributing to this as well – which is not so dissimilar from what traditional brokerages do through their marketing efforts. But I think this is a more attainable, lower barrier-to-entry solution for people who really want to pursue trading for a living.
Different trader types and trading models
Hertzberg noted that traditional brokerage tends to attract more experienced and conservative traders. In contrast, prop trading appeals to those seeking high returns and willing to take on higher risks with smaller initial investments. Sophisticated traders see prop trading as a way to amplify their trading edge by accessing more capital quickly. Both traditional brokerage and prop trading draw from the same demographic, but traders choose based on their preferences and goals.
“I think that traditional brokerage attracts a slightly more experienced, maybe more conservative type of trader. The ones that tend to gravitate towards prop trading or funded accounts are those that are attracted to the high end of the potential outcomes and are a little bit less cautious about the small amount of capital costs to pursue it. And then I think it’s also those that see an edge, as well. There are some very sophisticated traders within the prop trading funded account space as well, and they look at it and they go, ‘This is a way for me to pour gasoline on the small fire I already have with self-funded accounts. I can access more capital quickly and I can exploit that edge to a much greater degree.’ And so different traders, I think, gravitate to the two sides of that debate.”
Justin Hertzberg also explained that the rise of prop trading is beginning to challenge the market share traditionally held by retail brokers. This shift is not expected to eliminate traditional brokerage, but it will likely result in a more balanced distribution of traders between the two models over time.
“Right now we’re seeing that the the rise of prop trading is chipping away a little bit at the market share that was previously held and monopolized by retail brokers. So it is somewhat of a threat. I wouldn’t say it’s an existential threat to brokers. But there will be some percentage of that audience that gravitates naturally to prop trading or funded accounts, and some that will always consistently gravitate towards a self-funded brokerage account.
Challenges in the Prop Trading Industry
Hertzberg acknowledged that the prop trading industry has faced issues similar to other new financial products like FX, binary options, and crypto. Early adopters, often opportunistic and tech-savvy, have capitalized on these opportunities, sometimes leading to market challenges.
“If you go back 20+ years when FX came into retail trading, electronic trading, and then you go back, maybe 12 years for binary options and ten years for crypto…you have all of these very exciting new opportunities that come into financial services. And the early adopters are your opportunists. They’re the younger generation that’s very well plugged in, they see an opportunity they can mobilize and monetize.”
When discussing issues in the emerging prop trading industry, Justin acknowledged that early entrants were often young and inexperienced, as well as undercapitalized. This led to problems that harmed the reputation of prop trading. He also noted that some traders seek to exploit prop firms by finding unfair advantages within the systems.
FPFX Tech’s offering
In terms of risk management, Justin emphasized that prop trading risk profiles differ from traditional brokerage models and require customized tools. He highlighted the work FPFX Tech has done to develop specialist risk teams and over 25 (now, over 50) automated flags to help identify suspicious trading activity. This allows prop firms to maintain program integrity by removing traders who appear to be acting in bad faith.
Justin discussed FPFX Tech’s licensing options for prop trading firms. FPFX Tech offers a range of licensing options tailored to different types of partners. Their White Label Program enables small trading education firms or micro-influencers to establish their own prop trading firms using FPFX Tech’s technology and infrastructure, while FPFX Tech handles risk management and operations. For more sophisticated firms with capital and operational capabilities, the Partnership Model provides access to FPFX Tech’s technology with a higher level of customization. The Enterprise Model, similar in commercial terms to the Partnership Model, offers even greater customization and is suited for larger, well-capitalized firms looking to diversify into prop trading. These options cater to various business needs and enable partners to leverage FPFX Tech’s expertise and technology effectively.
Prop trading in LATAM is exploding
When speaking about Latin America’s potential, Justin pointed to geopolitical drivers of interest in international trading markets. He explained that growth in the region relies on relationship-building by local, trusted influencers rather than digital marketing methods, due to cultural preferences.
“And in terms of the prop space, it’s exploding. There’s a tremendous level of interest in LATAM. In general, I think it’s driven by a couple of factors that are unique to Latin America, where you have certain countries with very strong currency controls, high tax rates, and hyperinflation. There are reasons that people want to control their own financial destiny, they want to keep as many as much funds offshore as they can as well. And so they’re very interested in markets because it gets them out of the local economies, which is really just a dead end.
“But one of the things that’s always been unique about LATAM is it’s not driven by digital marketing. No matter how many display ads you might put out, that is not changing anyone’s opinion. You have to be in with the right people who have garnered trust with boots on the ground in the various countries inside of the region. Because it’s those people that they trust, it is not me, it’s not you. It’s not an ad, it’s none of those things. And so the growth is largely fueled by those influencers, those educators in the region, that have that audience and have built up that trust over years.”
Justin Hertzberg’s insights into the prop trading space, particularly in the context of the LATAM region, shed light on the evolving dynamics between traditional brokers and prop trading firms.
Attendees of the inaugural iFX EXPO LATAM 2024, which included industry leaders like Hertzberg, contributed to the event’s success. Their expertise and discussions underscored the growing importance of the LATAM market in the global financial landscape.
