The Business Model of Proprietary Trading Firms

In this article, Anis MAAZ (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2023-2027) explains how prop firms work, from understanding their business model and evaluation processes, to fee structures and risk management rules. The goal is not to promise guaranteed profits, but to provide a transparent, realistic overview of how proprietary trading firms operate and what traders should know before joining one.

Context and objective

Goal: demystify how prop firms make money, how their rules work, and what realistic outcomes look like, even if you are new to prop firms.
Outcome: a technical but accessible guide with a simple numeric example and a due diligence checklist.

What a prop firm is

Proprietary trading firms (prop firms) use their own capital to trade in financial markets, leveraging advanced risk management techniques and state-of-the-art technologies. But how exactly do prop firms make money, and what makes them attractive to aspiring traders? Traders who meet the firm’s rules get access to buying power and share in the profits. Firms protect their capital with strict risk limits (daily loss, max drawdown, product caps). Two operating styles you will encounter: In house/desk model: you trade live firm capital on a desk with a risk manager. Evaluation (“challenge”) model: you pay a fee to prove you can hit a target without breaking rules. If you pass, you receive a “funded” account with payout rules. For example, a classic challenge can be to reach a profit of 6% without losing more than 4% of your initial challenge capital to become funded.

The Proprietary Trading Industry: Origins and Scale

Proprietary trading as a business model emerged in the 1980s-1990s in the US, initially within investment banks’ trading desks before regulatory changes (notably the Volcker Rule in 2010) pushed prop trading into independent firms. The modern “retail prop firm” model, offering funded accounts to individual traders via evaluation challenges, gained momentum in the 2010s, particularly after 2015 with firms like FTMO (Czech Republic, 2014) and TopstepTrader (US, 2012).

Today, the industry includes an estimated 200+ prop firms globally, concentrated in the US, UK, and UAE (Dubai has become a hub due to favorable regulations). Major players include FTMO, TopstepTrader, Apex Trader Funding, Alphafutures, and MyForexFunds. Most are privately owned by founders or small investor groups and some (like Topstep) have received venture capital. The market size is difficult to quantify precisely, but industry reports estimate the global prop trading sector handles billions in trading capital, with the retail-focused segment growing 40-50% annually from 2020-2024.

Core Characteristics of prop firms

Capital Allocation: Prop firms provide traders with access to firm capital, enabling them to trade larger positions than they could on their own.
Profit Sharing: A trader’s earnings are typically a percentage of the profits generated. This incentivizes high-caliber performance.
Training Programs: Many prop firms invest in the development of new traders via structured training programs, equipping them with proven strategies and technologies.
Diverse Markets: Prop traders operate across various asset classes, such as stocks, forex, options, cryptocurrencies, and commodities.

How the business model works

The money comes from evaluation fees and resets: a major revenue line for challenge-style firms because most applicants do not pass the challenges. Once funded, a trader keeps the majority of the profits generated (often 70–90%) and the firm keeps the rest. Some firms charge for platform, data or advanced tools such as a complete order book, and pay exchange/clearing fees on futures.

In some cases, firms may charge onboarding or monthly platform fees to cover operational costs, such as trading infrastructure, data services, and proprietary software. However, top firms often waive such fees for consistently profitable traders.

For example, a firm charging $150 for a $50,000 evaluation challenge that attracts 10,000 applicants per month generates $1.5M in fee revenue. If 8% pass (800 traders) and receive funded accounts, and only 20% of those (160) reach a payout, the firm pays out perhaps $500,000-$800,000 in profit splits while retaining the rest as margin. Add-on services (resets at $100 each, platform fees) further boost revenue.

Who Are the Traders?

Prop firm traders come from diverse backgrounds: retail traders seeking leverage, former bank traders, students, and career-changers. No formal degree is required. The average trader age ranges from 25-40, though firms accept anyone 18+. Most traders operate as “independent contractors”, not employees, they receive profit splits, bearing their own tax obligations.

Retention is actually very low: industry data suggests 60-70% of funded traders lose their accounts within 3 months due to rule violations or drawdowns. Only 10-15% maintain funded status beyond 6 months. The model is inherently high-churn: firms continuously recruit through affiliates and ads, knowing most will fail but a small percentage will generate consistent trading activity and profit-share revenue.

What successful traders share :

The ability to manage risk and follow rules.
Analytical skills and a deep understanding of market behavior.
Psychological toughness to handle the highs and lows of trading.

It’s not an easy industry at all, and it’s better to have a real job, because only a small fraction of traders pass and an even smaller fraction reach payouts after succeeding in a challenge. Fee income arrives upfront, payouts happen later and only for those who succeed and manage to be disciplined through time.

For new traders, it’s not easy to pass a challenge when the rules are strict, because trading with someone else’s capital often amplifies fear and greed. Success is judged not only by profitability but also by consistency and adherence to firm guidelines, and any new traders struggle to maintain profitability and burn out within months.

EU regulators have long reported that most retail accounts lose money on leveraged products like CFDs: typically 74–89%, which helps explain why challenge pass rates are low without strong process and discipline.

Success rates: what is typical and why most traders fail

“Pass rate” (applicants who complete the challenge) is commonly cited around 5–10%. “Payout rate among funded traders” is often ~20%. End to end, only ~1–2% of all applicants reach a payout. All of these statistics vary by firm, product, and rules. Most people fail due to rule breaches under pressure (daily loss, news locks), overtrading, and inconsistent execution. Psychological factors like revenge trading, FOMO (Fear of missing out), are the usual culprits.

Trading Strategies, Markets, and Tools

Which Markets?

Most prop firms focus on futures (E-mini S&P, Nasdaq, crude oil), forex (EUR/USD, GBP/USD), and increasingly cryptocurrencies (Bitcoin, Ethereum). Some firms also offer equities (US stocks). The choice depends on the firm’s clearing relationships and risk appetite. Futures dominate because of high leverage, deep liquidity, and high trading windows.

Common Strategies

Prop traders typically employ “intraday strategies”:

Scalping (holding positions seconds to minutes)
Momentum trading (riding short-term trends), and mean reversion (fading extremes)
Swing trading (multi-day holds) is less common due to overnight risk rules
High-frequency strategies are rare in retail prop firms, and most traders use setups based on technical indicators (moving averages, RSI, volume profiles).

Tools and Platforms

Firms provide access to professional platforms like NinjaTrader, TradingView, MetaTrader 4/5,). Traders receive Level 2 data (order book), news feeds (Bloomberg, Reuters), and sometimes proprietary risk dashboards. Some firms offer replay tools to practice historical data.

The key performance idea

Positive expectancy = you make more on your average winning trade than you lose on your average losing trade, often enough to overcome costs. Here is a simple way to check:

Step 1: Out of 10 trades, how many are winners? Example: 5 winners, 5 losers (50% win rate). Step 2: What’s your average win and average loss? Example: average win €120; average loss €80. Step 3: Expected profit per trade ≈ (wins × avg win − losses × avg loss) ÷ number of trades. Here: (5 × 120 − 5 × 80) ÷ 10 = (€600 − €400) ÷ 10 = €20 per trade. If costs/slippage are below €20 per trade, you likely have an edge worth scaling, subject to the firm’s risk limits.

The firm wants you to stay inside limits, your average loss is controlled (stops respected), and your results are repeatable across days. They avoid the “luck factor” by putting rules like 2 minimum winning days to pass a challenge and impossible to make more than half of the challenge target in one day.

There are many ways to pass a challenge, depending on your trading strategy: If you aim for trades where your win is 5 times higher than what you risk, you do not need a winrate of 50% or 80% to pass the challenges and be profitable.

Payout mechanics: example with Topstep (to clarify the “50%” point)

Profit split: you keep 100% of the first $ 10,000 you withdraw; after that, the split is 90% to you / 10% to Topstep (per trader, across accounts).

Per request cap: Express Funded Account: request up to the lesser of $ 5,000 or 50% of your account balance per payout, after 5 winning days. Live Funded Account: up to 50% of the balance per request (no $ 5,000 cap). After 30 non consecutive “winning days” in Live, you can unlock daily payouts up to 100% of balance.

Note: “50%” here is a cap on how much you may withdraw per request—not the profit split. Other firms differ (some advertise 80–90% splits, 7–30 day payout cycles, or higher first withdrawal shares), so always read the current Terms.

Why traders choose prop firms (psychology and practical reasons)

Traders are attracted to prop firms for both psychological and practical reasons. The appeal starts with small upfront risk: instead of depositing a large personal account, you pay a fixed evaluation fee. If you perform well within the rules, you gain access to greater buying power, which lets you scale faster than you could with a small personal account.

But this method is indeed a psychological trap, because most of the traders will fail their first account, buy another one because it’s “cheap” and it will become an addiction when they will start burning accounts every day because it “doesn’t feel real” for them. The trade offs are real, evaluation fees and resets can add up, rules may feel restrictive, and pressure tends to spike near limits or payout thresholds. All these factors contribute to why many candidates ultimately fail.

However, for experimented traders who can manage psychology, the built in structure, risk limits, reviews, and a community adds accountability and often improves discipline. Payouts can also serve as a capital building path, gradually seeding your own account over time.

Regulation: A Gray Zone

Proprietary trading firms operate in a largely unregulated space, especially the evaluation-based model. In the US, prop firms are not broker-dealers; they typically collaborate with registered FCMs (Futures Commission Merchants) or brokers who handle execution and clearing, but the firm itself is often a private LLC with minimal oversight. The CFTC (Commodity Futures Trading Commission) regulates futures markets but not prop firms’ internal challenge mechanisms.

In France, the AMF has issued warnings about unregulated prop firms and emphasized that if a firm collects fees from French residents, it may fall under consumer protection law. Some firms have pulled out of France or adjusted terms. The UK FCA has similarly warned consumers. The UAE (DIFC, DMCC) offers more permissive environments, attracting many firms to Dubai.

Conclusion

Prop trading firms offer a compelling proposition: controlled access to institutional sized buying power, standardized risk limits, and a structured pathway for transforming skill into capital without large personal deposits. In this model, firms protect capital through rules and fees, while profitable traders create a scalable environment for strategy development and execution.

At the same time, the evaluation-and-payout cycle can amplify cognitive and emotional traps. Fee resets, drawdown thresholds, and profit targets concentrate attention on short-term outcomes, which can foster overtrading, sensation seeking, and schedule-driven risk-taking. The same leverage that accelerates account growth also magnifies behavioral errors and variance, making intermittent reinforcement (occasional big wins amid frequent setbacks) psychologically sticky and potentially addictive.

In the end, prop firms are neither shortcut nor scam, but a high-constraint laboratory. They reward, stable execution, rule adherence, and penalize improvisation and impulse. As a venue, they are well suited to disciplined traders with repeatable processes, robust risk controls, and patience for incremental scale. Without those traits, the structure that protects the firm can become a treadmill for the trader.

At the end of the day, the prop firm model is designed for the firm to profit from fees, not trader success. With 1-2% end-to-end success rates, it’s closer to a paid training lottery than a career path.

If your goal is to learn trading, SimTrade, paper trading, or small personal accounts teach discipline without predatory fee structures. Joining a bank’s graduate program gives you access to senior traders, research, and real market-making or flow trading experience.

If you’ve already traded profitably for 1-2 years, have a proven strategy, need leverage, and fully understand the fee economics, then a top-tier firm (FTMO, Topstep) could provide capital to scale. But as a first step out of ESSEC, I would prioritize banking or buy-side roles that offer mentorship, stability, and credentials.

Why should I be interested in this post?

Prop firms reveal how trading businesses monetize edge while enforcing strict risk management and incentive design. Grasping evaluation rules, fee structures, and payout mechanics sharpens your ability to assess unit economics and governance. This knowledge is directly applicable to careers in trading, risk, and fintech—helping you make informed choices before joining a program.

Useful Resources

Topstep payout policy and FAQs (current rules and examples)

The Funded Trader statistics on pass/payout rates

How prop firms make money (evaluation fees vs profit share): neutral primers and industry explainers

General overviews of prop trading mechanics and risk controls

About the author

The article was written in October 2025 by Anis MAAZ (ESSEC Business School, Global Bachelor in Business Administration (GBBA), 2023-2027).