Industry Knowledge

The Proprietary Trading Firm
Industry

A comprehensive overview of the proprietary trading firm industry β€” from its historical origins and operational models to the ongoing debates within the global financial community.

What Is a Prop Firm?

A proprietary trading firm (prop firm) is a financial organization that deploys its own capital across financial markets, rather than managing assets on behalf of external clients. Profits generated belong entirely to the firm and the traders it employs or funds.

In recent years, the retail prop firm model has emerged β€” allowing independent traders to access significant capital through a performance evaluation process, without committing their full personal capital.

Trading CapitalFirm's own capital
ObjectiveIndependent returns
Profit Split50–90% (trader)
Personal RiskLow / Limited

Historical Background

1970–1980s

Proprietary trading emerged in the 1970s–1980s on Wall Street, as major investment banks like Goldman Sachs and Morgan Stanley began allocating capital to trade for their own accounts.

2008–2010

After the 2008 crisis, the Dodd-Frank Act and Volcker Rule (2010) severely restricted prop trading at banks, prompting talented traders to establish independent prop firms.

2015–Present

From 2015, the funded trader / challenge-based model exploded with FTMO, The Funded Trader, MyForexFunds and hundreds of similar companies, democratizing capital access worldwide.

Operational Models

Direct Funding

The firm recruits professional traders, provides real capital, and shares profits (50–80% to the trader). Traders don't contribute personal capital but follow strict risk parameters.

Challenge / Evaluation

Traders pay a fee to undertake an evaluation (1–2 phases) on a simulated account. Meet profit targets while respecting risk limits β†’ receive a funded account.

Primary revenue comes from challenge fees, not actual trading β€” creating notable conflicts of interest.

Evaluation Process

01

Phase 1

Achieve 8–10% profit target with max daily drawdown 4–5% and max total drawdown 8–10%.

02

Phase 2

Verify consistency with a 5% target, same risk rules. Minimum 4–10 trading days required.

03

Funded Account

Receive live or simulated account with 70–90% profit sharing. Some firms add consistency rules.

Risks & Controversies

Regulatory Issues

In 2023, MyForexFunds was sued by CFTC and ASIC for fraud and shut down β€” raising fundamental questions about transparency and oversight across the industry.

Business Model

Many analysts argue certain prop firms operate like B-book brokers β€” profiting from trader failure. Challenge pass rates are typically below 10%.

Risks for Traders

  • β€’Non-refundable challenge fees upon failure
  • β€’Unexpected rule changes after being funded
  • β€’Some firms delay or deny profit payouts
  • β€’Limited legal protection in many jurisdictions

Notable Prop Firms

Traditional Prop Firms

Jane Street β€” Specializes in arbitrage and market making in ETFs and fixed income.
Citadel Securities β€” One of the world's largest market makers across asset classes.
DRW Trading β€” Operates across crypto, derivatives, and traditional instruments.

Retail Prop Firms

FTMO β€” Pioneer of the challenge model, founded in Czech Republic in 2015.
The Funded Trader β€” Known for diverse programs and high profit-sharing ratios.
Apex Trader Funding β€” Focused on the U.S. futures market.
TopstepTrader β€” One of the first firms to apply the evaluation model to futures.