The brokerage industry is undergoing a dual transformation as proprietary trading firms rush to acquire brokerage licences while hedge funds grow increasingly willing to switch prime brokers. The once-separate worlds of prop trading and traditional brokerage are converging, driven by platform access, financing costs, and regulation.
Prop firms turn themselves into brokers. Only a few years ago, retail brokers were launching prop trading challenges, attracted by recurring evaluation fees and a model that avoided holding client money. That trend has reversed. Now many prop firms are seeking brokerage licences in jurisdictions such as Mauritius, Seychelles, Comoros, Labuan and Vanuatu. A major motivation, often overlooked, is access to MetaTrader infrastructure. While a licence does not guarantee MetaQuotes approval, it strengthens the case for establishing a direct relationship with the platform provider. Obtaining a licence also allows firms to control more of the technology stack and offer execution services, payment infrastructure and live trading accounts under their own brands.
This shift carries heavy regulatory implications. Traditional prop firms typically operate simulated evaluations and avoid holding client funds. Once they accept deposits or offer regulated investment services, they fall under capital adequacy, anti-money laundering, and client money segregation rules. The transition is fundamentally different from running a challenge-based business. The past two years have exposed governance gaps: FundingTicks retroactively changed rules and shut down, Topstep suffered repeated platform outages, and ATFunded suspended operations. Regulators such as the UK's Financial Conduct Authority, the Cyprus Securities and Exchange Commission and the Australian Securities and Investments Commission have yet to produce dedicated guidance for a sector that increasingly blends evaluation, simulation and live brokerage.
Hedge funds shop for new prime brokers. Meanwhile, on the institutional side, new research from Acuiti and TS Imagine shows that 57% of hedge funds have switched or considered switching prime brokers because of financing costs or leverage terms, and 55% believe onboarding another provider would be straightforward. Basel III capital rules have made it more expensive for prime brokers to supply leverage, creating a supply-and-demand imbalance. The report found that 55% of firms have experienced multiple leverage reductions or tighter margin requirements over the past five years, and only 16% say available leverage consistently meets their needs. Commodities and credit funds face the greatest difficulty, while equity-focused funds still enjoy better access. Transparency is now a competitive advantage: six in ten respondents lack clarity over how available leverage is determined, and 61% hold a negative view of traditional capital introduction services. As a result, hedge funds increasingly demand data-driven explanations and rely on technology for cross-counterparty risk and collateral management.
These parallel shifts are reshaping the brokerage landscape. For prop firms, the move into regulated territory tests whether existing supervisory frameworks are fit for purpose. For hedge funds, the stickiness of prime brokerage relationships is fading, creating openings for smaller banks and specialist financing providers. Both trends point to a market where balance sheet efficiency, transparency and technology are displacing long-standing relationship-based models.
