What is a prop firm?
A proprietary trading firm (prop firm) is a company that provides traders with the firm’s capital to trade financial markets, rather than having traders use only their own money or clients’ funds. The firm supplies access to capital, execution platforms, and risk rules; in return it takes a share of the trader’s profits and enforces strict risk limits to protect its capital. Prop firms exist in many shapes — from large market-making firms to retail-facing programs that evaluate independent traders and “fund” the ones who pass.
Key points about the prop-model:
- Traders get access to larger capital than they’d normally have, letting them scale strategies.
- The firm manages risk by setting drawdown/daily loss limits and by monitoring behavior.
- Profit split: traders receive a portion of profits (commonly 50–90% depending on firm).
- Evaluation or selection: many retail prop firms use an evaluation process (challenge/test) to select traders.
How prop firms make money (business model)
- Profit share — they keep part of traders’ profits.
- Fees — many firms charge an upfront evaluation (challenge) fee to access the evaluation platform (sometimes refundable if you pass).
- Scale & leverage — if a trader is consistently profitable, the firm can increase allocated capital and capture more net trading gains.
Benefits and tradeoffs for traders
Benefits
- Trade larger size without risking your own full capital.
- Access to professional-grade infrastructure and analytics.
- Can build a track record on a funded account and receive regular payouts.
Tradeoffs / Risks
- You must obey strict rules (max daily loss, maximum overall drawdown, sometimes minimum trading days).
- Upfront fees and the possibility of failing the evaluation.
- As the firm provides capital, they control risk and can close positions or remove funding if rules are breached.