Start a prop firm with cTrader today
Earlier this week I was speaking to someone who said they’d never seen the maths of the prop model broken down and so I figured that would be a fun thing to look at today.
The first point to note is that, much as brokers’ 80% win-loss figure fluctuates, both between firms and over different periods of time, so too is there seemingly no hard and fast rule for props.
For example, the pass rate at E8 Markets from January 2023 to March 2024 was 17.7%.
Fintokei has said that its pass rate for 2024 was 23%.
I think the best publicly available figure here is from FPFX. The company’s CEO Justin Hertzberg gave a bunch of data out about props in a YouTube interview last year.
The FPFX data is also valuable because, unlike the two props mentioned above, it shows the payout rate from those who pass.
According to FPFX, the average pass rate is 14%. But only half of those people – or 7% of the total – actually get a payout.
The average payout for those in the 7% figure is 4% of the account value.
When you look at those figures then you can start to work through the numbers.
For example, FTMO’s $100k account challenge currently costs €540.
So let’s say 1,000 people take this challenge.
Total revenue is €540,000
FTMO does not offer a refund for people that pass the challenge. So even if 14% pass, that does not mean they have to give back any money to those people.
The result is that the important figure for our purposes is the 7% payout.
1,000 people taking the challenge, means that 70 have got a payout.
If the average is 4% of the account value, which in this case is $4k (4% of $100k) that means total payouts will be…
70 x $4,000 = $280,000 (€258,000)
What was not mentioned in the FPFX interview was whether that figure is inclusive of the account fee refund, which FTMO gives if you get a payout.
However, here we can look at FTMO’s 2023 accounts and see that the answer is that it probably does include it. Why?
FTMO lists nondescript ‘operational costs’ as its biggest expense in its financial statements for 2023.
Total revenue at the company was $203.9m. Those operating costs were $100.3m. In percentage terms that is ~49% of total revenues.
If we could go back to the example above, €258,000 of payouts would be 47.8% of €540,000 in sales – not so different. It’s also a sign that the sums listed by FPFX are accurate.
So the total liabilities for the prop are €258,000, compared to revenue of €540,000.
This is where things get interesting because you may look at that and think the margins are going to get squeezed.
The reason for that is, by way of comparison, if you were looking at those sorts of figures for a company like Plus500 or IG Group, their entire outgoings are typically about 50% – 60% of revenues.
That means that for props, payouts alone, as a proportion of overall revenues, seem to be the close or about the same as the entire outgoings of the top brokers.
However, the striking thing here is how much lower the operational costs of a prop are. No legal teams, no trading teams, no compliance staff, no need to do things like trade reporting, and so on.
The result is that staff costs are way, way lower. I figured 70% to 80% lower as a rough guess. However, for FTMO in 2023, staff costs were just $4.7m.
That means FTMO’s staff costs were only about 2.3% of total revenues in 2023.
IG Group’s fees for staff and legal costs last year were 23.4% of total revenues – more than 10x the proportion of FTMO’s. For CMC Markets it was 28.0%.
The result of this is that props have a lot more leeway to spend on marketing and advertising. For example, both IG and CMC spend a little under 10% of revenues on marketing.
FTMO could easily do the same and not suffer too badly, in terms of hurting its bottom line.
The final point to note here is that many props are calling for regulation.
This is a sign of why props should be wary of that.
Regulation will increase staff and operational expenses, which props cannot really afford. High operational costs will either significantly hurt the margins of the business or make it unviable. If staff costs were akin to brokers would mean this is just not a good business to be in.
