Since prop trading has blown up in the last couple of years, we get a lot of people asking two questions – how do prop firms make money and do they actually place real trades? Sometimes it’s traders that want to learn more about prop. Some people asking want to start a prop firm themselves. Others are usually liquidity providers that want to do business with existing props.
The short answer to these two questions is that the vast majority of props only make money from challenge fees. If a trader gets a funded account and makes a profit from it, they get paid from the revenue that the prop earned from challenge fees.
However, some props do claim that they place real trades and generate money that way. But it’s a small minority that do and hard to verify how much this actually happens. Why is that the case? Read on to find out or watch the video below.
How do props make money? Challenges
The main way that prop firms make money is from traders paying to take their challenges. FTMO, which is arguably the biggest company in the sector, has openly said that only about 10% of clients end up passing the challenge.
In some ways this is what you’d expect. Most brokers tend to see about 80% of clients lose money over a 12 month period. Challenges are shorter and the rules about what traders can do are far stricter – so you’d assume the proportion of people passing challenges would be smaller than those that are trading profitably with a broker.
Another factor to consider here is that a lot of people who do pass a challenge will still end up losing their account. This might be because they breach the rules within that account or just because they don’t trade profitably once they are given it.
The result is that even among traders that receive funded accounts, many do not end up making money or breach rules.
Another factor to consider here is that this is not like a ‘traditional’ proprietary trading company. Funded traders are not direct employees, who are coming to work every day, and getting a salary in return for generating profitable returns for the firm.
Even if they are profitable for a bit, they can ultimately blow up their account or breach the account rules, meaning they lose their funded account. Indeed, data from prop trading technology provider FPFX shows that the average funded trader blows up their account in just over three weeks!
So if you were thinking that, over the course of time, a prop firm would see a growing number of funded accounts, who in turn account for a growing proportion of overall revenues, that is not accurate.
Do prop firms make money from real trading?
This leads us on to the second area as to how prop firms make money – real trading. There is still a lot of murkiness around whether or not prop firms actually do place real trades. From what we see there is a level of nuance to this and it ultimately depends on the model a given prop firm is operating under.
So if you are wondering, do prop firms actually place real trades, the answer is some of them do but the majority don’t.
The reason that’s the case is due to how firms structure their funded account offering. We see three methods that prop firms are using to structure funded accounts, although there may be other variations on these out there.
A prop firm only offers demo trading
The most common model that we see today is that props only offer demo accounts and no real trades are ever placed. That is true for the challenges and the funded accounts that the prop is offering.
What this means is that any profits a trader with a funded account generates have to be paid for using the revenues produced by people taking challenges. Props have designed methods, like capping account sizes and profit share size, to deal with the risks of this model.
We think this is not a good model. If you are offering prop trading, there is an implicit assumption that you are offering real trading at some point. If you aren’t doing that, you aren’t a prop company, you are more like a casino.
And indeed, if you are running this model as a prop company, you could actually be subject to gambling regulations. What you are offering is effectively a skilled game with a payout – and this is regulated as gambling in many jurisdictions.
Claims that this is like a b-book broker model are misguided. A b-book broker has the regulatory approval to offer securities dealing services. Prop firms offering demo only trading operate under no equivalent framework. Brokers also have the ability to offset opposing positions and capture spread, using the margin that a loss making trader puts down to pay out profitable positions. Again, prop firms that never place real trades don’t have this.
Giving traders a live account
The second method we see some props operating is that a prop firm assesses traders on a demo account but puts funded accounts on a ‘live’ account.
Props like FunderPro and BullRush both claim that traders who pass their challenges and receive funded accounts operate using this model.
The danger for prop firms using this model is that funded accounts can often be huge in size. To top that off, prop traders who get funded accounts usually blow them up very quickly.
The result? If you are a prop and you are giving real funded accounts to traders, you are going to have to put down a lot of money as margin to keep their accounts open.
The second problem is that if the trader with the funded account blows up that account, they don’t take the loss – the prop firm does.
As a result, props have dabbled in this model but they have to very careful about how they manage the risk around it.
The copy trade prop model
The final model we see is kind of like a combination of the first two. A trader takes a challenge on a demo account. If they are successful, the funded account is still on a demo account.
The difference in this instance is that the trades a funded trader makes in their demo account are mirrored in a real money account managed by the prop firm.
There is a huge caveat here that traders should be aware of about this model.
Prop firms may claim that they are mirroring real trades but there is often no way to validate that’s actually taking place. So even if a firm claims that they are copying real trades, it’s hard to know if they are really doing it.
To be fair, there are good reasons why you would not want to copy funded account trades as a prop. As we’ve seen funded accounts often do not last. So why would you copy the trades of an account that, statistically speaking, is very likely to end up losing money?
The other problem props face is distinguishing between lucky traders and others who are genuinely good, talented traders with long-term potential. The result is that it’s very hard for them to know whether or not they should be copying trades in a live account.
Prop firm broker model
The other model that is used much less is to offer prop trading within a brokerage account.
The best example of this that we’re aware of is Axi Select.
This is a prop model operated by brokerage group Axi, where traders open a live brokerage account and then trade with Axi, just like they would with a regular broker.
The difference is that Axi evaluates the performance of traders in the Axi Select programme and then allocates capital to them if they pass.
This model is harder to do for regulatory reasons but is arguably one of the more efficient ways of running a prop firm, as it helps remove a lot of the risk that prop firms face from a mismatch between their challenge sales and the payouts they have to make to successful funded traders.
Almost all prop firms make money just from challenges
The bottom line is this – almost all prop firms today make money from selling challenges. That is their only source of revenue. They make payouts to successful traders from the money they make selling challenges.
Some prop firms either do or claim that they can enhance revenues and mitigate risk by putting funded traders on to live accounts. However, this model is also risky, given that so many funded traders end up blowing up their accounts. A prop firm that gives these people a live account has to wear that loss.
How prop firms make money FAQ
How do prop firms make money?
Nearly all prop firms make money from challenge fees. That is their only source of revenue and is where payouts also come from.
Do prop firms use real money?
No, most prop firms only use simulated funds, even if you are on a funded account. There are some exceptions to this, like Axi Select.
Do prop firms copy your trades?
Some prop firms do copy trades in funded accounts. The majority of prop firms do not copy your trades because of the huge amount of risk it creates for their business.
Do prop firms pay out?
Well run, respectable prop firms pay out. That money is almost certain to come from other challenge fees. There are scams out there though, so be careful as they won’t pay out!
Do prop firms make money?
Yes, prop firms run well can make a lot of money. FTMO made over $200m in revenue in 2023, for example.
