Proprietary trading, commonly referred to as prop trading, describes the practice where traders engage in trading activities using the capital of a prop firm or financial institution rather than their own capital. These traders participate in a range of financial markets and use a variety of financial instruments, including shares, options, futures, and contracts for difference (CFDs). The primary goal of prop trading is to generate profits for the institution using the capital allocated by the firm for trading.
While there are businesses that only engage in prop trading, it is also a practice by:
A prop trading firm is a company that provides its traders with access to capital. In return, the traders share a percentage of the profits they generate with the company.
Individuals face many hurdles on their journey to become professional traders. While a lack of sufficient capital is the most obvious one, they may also lack access to technology, market data, and tools. Prop firms can help skilled individuals propel their trading careers by providing capital, training, and general support.
The set-up of prop firms varies significantly. Some prop trading companies have physical offices and will provide a desk for their traders. Others operate remotely and can accept traders across the globe into their program.
An individual who trades using the firm's own funds instead of client funds is known as a prop trader. To make money for the company, they typically participate in speculative trading, which can involve both short- and long-term trading.
Proprietary trading firms typically allow their traders autonomy in making trading decisions. However, they establish a limit known as the maximum drawdown level. If a trader's losses reach this predefined threshold, the firm will intervene and suspend the trader's trading activities to mitigate further financial risks.
Prop traders make all or most of their income from splitting profits they generate in financial markets with the prop firm that provides them with capital.
Prop traders face the same challenges as other traders but benefit from access to capital, technology, and interaction with other skilled traders.
When a trader is accepted by a proprietary trading firm, they are allocated a certain amount of capital to trade with. The size of this capital allocation, as well as the proportion of profits the trader is entitled to keep, varies depending on the trader's level of experience and their track record of past trading results.
Prop traders employ a variety of trading strategies, from short-term trading to swing and position trading. Similarly, traders may use either fundamental or technical analysis when analysing markets, or a combination of the two.
While risk management remains critical, trading on behalf of a prop firm is subject to more stringent regulations and increased scrutiny in order to limit the firm's capital exposure to potential losses.
To explain how prop firms work, we will use a hedge fund analogy.
Hedge funds rely on clients who provide the company with capital. The fund managers ultimately answer to their clients, who receive an average of 60–80% of the profit generated.
Prop firms, on the other hand, don’t take on clients as investors. Instead, they use their own corporate capital to generate profits in financial markets. This allows them greater freedom, flexibility, and the opportunity to keep a larger percentage of the overall returns.
For traders looking to access prop firm capital, the most common route is through a funded trading account. For a detailed breakdown of how funded accounts work, see What is a funded trading account.
Prop firms generate revenue through several streams, depending on their structure and operational model.
The primary source of revenue for most prop firms is a share of the profits generated by their traders. For example, a trader that generates $100,000 in profits during a certain period and has an 80/20 profit share agreement will receive $80,000, while the remaining $20,000 goes to the firm. While the trader keeps the larger share, the firm benefits from deploying capital across a large number of traders simultaneously.
Many prop firms charge traders a one-time or recurring fee to participate in an evaluation or challenge before receiving funding. This has become a significant, and for some firms, primary revenue stream. Traders pay the fee regardless of whether they pass the challenge, which means firms with high failure rates can generate substantial income from evaluation fees alone. This is why evaluating a firm's business model matters: a firm that profits mainly from failed challenges has different incentives than one that profits primarily from successful traders.
Some firms charge ongoing subscription or membership fees to maintain access to the program, trading tools, or educational resources.
Some prop firms, particularly those with physical offices or established training programs, generate additional revenue by selling educational courses, providing access to proprietary software, or licensing their trading infrastructure.
Prop traders make money by earning a profit share, a percentage of the profits they generate using the firm's capital. This is their primary source of income.
The percentage a trader receives varies by firm and program. Most prop firms currently offer profit shares ranging from 80% to 100%, though the conditions attached vary significantly. Firms offering higher splits often operate on simulated accounts and charge upfront evaluation fees, meaning traders risk their own money before ever seeing a payout.
Beyond the standard profit share, some firms offer commissions for referring new traders to the program.
Prop trading can provide individual traders with several advantages:
While we have emphasised several significant benefits of prop trading, it is not without its drawbacks:
The entry requirements to join a prop firm vary significantly. For example, a traditional prop firm whose traders are based in a physical office, equipped with advanced institutional infrastructure, and supported by extensive internal training will have strict entry requirements, a long screening process, and a limited number of open positions.
On the other hand, remote prop companies that focus on providing funded accounts online make it much easier for talented traders to join. In a typical remote setup, a trader pays a joining or subscription fee before participating in a challenge or assessment period. They must demonstrate their trading abilities on a demo account while adhering to strict maximum drawdown limits and profit targets. If the trader successfully completes the challenge, they are admitted into the program and become eligible for future funding increases.
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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.
FAQ
Prop trading is the practice where traders engage in trading activities using the capital of a prop firm or financial institution rather than their own capital.
Prop trading firms are made up of traders who trade with the company's capital. The traders could be full-time employees or only participants in the company's allocation program.
A capital allocation program refers to the process of distributing financial resources among different trading strategies or traders based on their performance, risk profile, and potential return on investment.
Prop firms fund traders to earn a share of their profits, which constitutes a major part of their revenue, and may also gain income through subscription, joining fees, and selling educational courses.
Joining a prop trading firm offers traders access to more capital, advanced trading tools, and opportunities to network with professional traders.
Prop trading involves inherent risks like any trading, yet the firm often bears the bulk of it by risking its capital, though traders risk losing subscription or joining fees and not passing the firm's trading challenge.
Not necessarily. While you must demonstrate consistent risk management and skill to scale up, joining a capital allocation program does not always require decades of professional experience, as individual programs tailor their entry requirements to spot raw talent.
