What is a prop trading firm?
If you have ever wondered what a prop trading firm is, think of it as a company that puts its own money on the line either directly or through carefully controlled simulations to profit from market moves. Unlike brokers that earn commissions on client trades, a proprietary firm aims to earn from trading profits (PnL) generated by strategies run by in-house teams or by external traders who pass evaluations. In simple terms, a broker gets paid when you trade, while a prop firm gets paid when the trading is successful.
There are two major types you will encounter in 2025.
Institutional or “true prop” firms are well-capitalized trading companies that employ staff and contractors to trade using the firm’s balance sheet. These firms often specialize in high frequency trading or quantitative strategies. They have strong compliance departments, robust infrastructure, and strict performance expectations. They tend to be based in major financial centers such as New York, Chicago, or London.
Retail-oriented evaluation programs, often called funded trader models, operate online and attract retail traders worldwide. Here, traders typically pay an evaluation fee and must pass a set of rules including profit targets and maximum drawdown limits. If they succeed, they receive access to a funded account with a profit split, usually in the range of 70 to 90 percent. Many of these accounts still operate in a simulated environment with risk controls in place, though some eventually connect to live markets once traders demonstrate consistent performance.
Why does this distinction matter? The risk, regulation, and expectations are different in each case. Institutional firms are regulated entities that trade actual firm capital. Retail-oriented programs often function with simulations even after traders “pass,” relying on risk overlays and internal routing. This is not inherently negative, but it highlights why clear disclosures are important.
Prop trading vs retail trading
At first glance, prop trading might look like retail trading. Both involve analyzing charts, executing trades, and hoping the PnL tilts in your favor. The difference is that retail traders use their own limited capital while prop traders are typically funded by the firm after proving skill.
Another distinction is the level of support. Retail traders are often solo operators. Prop traders usually gain access to advanced trading platforms, communities, and sometimes mentorship. This makes the environment more collaborative and professional, similar to being part of a sports team rather than a solo athlete.
Institutional vs evaluation-based firms
Institutional prop firms such as high frequency trading shops focus on market making, arbitrage, and quantitative strategies. They deploy billions of dollars daily and employ PhDs, mathematicians, and seasoned traders. These firms are considered the traditional model of proprietary trading.
Evaluation-based firms, on the other hand, provide opportunities for retail traders without requiring large personal deposits. The trader pays a challenge fee, passes strict performance targets, and then receives access to a simulated or risk-managed account with a profit split. This model has become increasingly popular since 2020 as remote trading opportunities expanded.
How prop firms make money
Prop firms make money in different ways depending on their category. Institutional firms earn directly from profitable trading strategies. Their incentives are aligned with building reliable models, hiring top talent, and managing risk effectively.
Evaluation-based firms earn from both trader performance and evaluation fees. Many rely on the fact that most traders fail their first attempt, which generates recurring income for the firm. At the same time, they benefit when successful traders generate consistent profits. Some also collect revenue from spreads, data feeds, or platform usage.
Prop firm structures
Some firms operate as desk-based trading floors. These firms have fast-paced office environments where traders sit together, monitor performance dashboards, and work under direct supervision. This model is closer to traditional Wall Street trading culture.
Other firms operate as remote prop firms. Traders work from home and connect via proprietary software. These firms exploded in popularity after 2020 and are now mainstream. They provide access to global markets without requiring relocation or commuting. Many firms also combine models, with some traders on-site and others remote, depending on their role and market coverage.
| Feature | In-House | Remote |
|---|---|---|
|
Location |
Office-Based |
Work From Anywhere |
|
Licensing |
Often Required |
Often Not Needed |
|
Culture |
Team-Oriented |
Independent |
|
Onboarding |
In-Person |
Virtual |
Evaluation phases explained
Most prop firms require traders to pass an evaluation phase before gaining access to funding. This can involve one-step or two-step challenges. Traders must reach a profit target without breaching rules such as maximum drawdown or daily loss limits.
For example, a two-step evaluation might require 8 percent profit in the first stage and 5 percent profit in the second stage, with strict daily loss limits. Only after passing both steps does the trader qualify for a funded account. These evaluations are designed to filter out undisciplined traders and reward consistency over time.
Instant funding vs challenge funding
Some firms now offer instant funding where a trader can skip the evaluation and access capital immediately after paying a higher fee. These accounts usually come with stricter rules, lower profit splits, or lower initial capital allocations.
Challenge funding remains the most common path, as it allows firms to screen traders more effectively while keeping their risk limited. Instant funding appeals to traders who are confident in their ability and prefer immediate access, while challenges favor those willing to prove themselves gradually.
Account types and assets
Prop firms offer accounts across various asset classes. Some specialize in futures and provide connections to exchanges such as CME. Others focus on forex, indices, and commodities, often through platforms like MetaTrader. A smaller number support equities or cryptocurrencies.
The asset class matters because each comes with unique risk characteristics and rules. Futures often require strict daily loss limits, while forex programs may allow more flexibility but impose consistency rules.
Risk rules that matter
The rules set by prop firms are critical. The most common include daily loss limits, maximum drawdowns, profit targets, and trading consistency requirements. These are designed to protect the firm’s capital and ensure traders manage risk responsibly.
A trader who understands and respects these rules has a better chance of passing evaluations and maintaining a funded account. Many failures occur not from poor strategy but from ignoring or misinterpreting the rules.
Payouts and profit splits
Once funded, traders typically receive between 70 and 90 percent of the profits. The firm keeps the remaining share to cover risk and operations. Payouts usually occur on a biweekly or monthly cycle.
Some firms also impose minimum trading days before a payout can be requested. Others may require KYC verification and specific withdrawal methods. It is important to read payout policies carefully before committing.
Fees and hidden costs
Evaluation fees are the most obvious cost. They vary based on account size, with larger capital allocations requiring higher upfront payments. Beyond that, some firms charge monthly platform fees, market data fees, or reset fees if a trader fails an evaluation and wants to try again.
Traders should compare not only the fee structure but also the transparency of these costs. A low entry fee may be offset by high recurring charges.
Regulatory landscape
In the United States, the Commodity Futures Trading Commission (CFTC) has issued advisories cautioning traders to be wary of unrealistic promises in online trading programs. Similar warnings have been echoed by other regulators worldwide.
In Europe, the European Securities and Markets Authority (ESMA) and national regulators have also paid closer attention to retail-focused trading models. While many prop firms operate legally as training and evaluation providers, traders must remember that most of them are not regulated brokers.
| Feature | Prop Firm | Hedge Fund | Retail Trader |
|---|---|---|---|
|
Capital |
Firm-Funded |
Client-Funded |
Self-Funded |
|
Compensation |
Profit Split |
Management/Perf. Fees |
Own Profits |
|
Regulation |
Light (usually) |
Heavily Regulated |
Minimal |
|
Structure |
Evaluation + Scaling |
Investor Relations + Compliance |
Solo |
What is and isn’t regulated
A critical distinction is that prop firms are usually not regulated in the same way as brokers. Brokers must register with regulatory agencies and follow strict compliance rules. Prop firms, especially evaluation-based ones, often function as educational services and operate under different rules.
This does not mean they are illegal. It simply means traders should not expect the same protections as when trading with a licensed broker. Always verify what a firm claims and cross-check against public registries.
Legit signals vs red flags
Legitimate firms clearly disclose whether accounts are simulated, explain their risk rules, and avoid making unrealistic promises. They also provide transparent payout terms and customer support.
Red flags include guaranteed returns, vague rules, and lack of clarity on whether trades are executed in live markets. If a firm makes promises that sound too good to be true, they probably are.
Conclusion
So what is a prop trading firm in practice? It is either an institutional company trading its own balance sheet with professional staff or a retail-oriented program that evaluates traders through rules-based challenges and then offers access to capital under strict guidelines.
Both paths can be rewarding, but success requires discipline, clear understanding of rules, and careful due diligence. Always read disclosures carefully, compare costs, and choose firms that align with your strategy and goals.
FAQ
It varies. Some traders earn six figures annually. Others wash out in a month. Consistency is key.
Many are—but some aren’t. Stick to firms with verified reviews, clear terms, and long-standing reputations.
Only if you breach terms. Most firms limit your personal risk to the evaluation fee.
Yes. Funded accounts trade live capital, and profits can be withdrawn after hitting thresholds.
Not always. Some firms welcome beginners with training programs.
Yes, usually for the challenge or evaluation account. Read the fine print.
