Proprietary trading firms, or prop firms, fund traders with company capital in exchange for a share of the profits. Instead of using client deposits like traditional brokers, these firms make money in different ways, from profit splits to evaluation fees and trading desk operations. But a common question among aspiring traders is: How do prop firms make money?
Understanding a firm’s revenue model is important for traders looking to join a prop firm. Some firms rely heavily on trader performance, while others generate income through fees, commissions, or internal trading strategies. This article breaks down the main ways prop firms make money and what traders should watch for when choosing a firm.
What Are Prop Trading Firms?
Proprietary trading firms, or prop firms, are companies that provide traders with capital to trade financial markets. Instead of trading client funds like traditional investment firms, they use their own money to generate profits. In return, traders keep a percentage of their earnings, while the firm takes a cut as compensation for providing funding.
Unlike retail traders who trade with personal funds, prop traders don’t need to risk their own money. This allows them to take larger positions and potentially earn more. Many firms offer structured programs where traders must pass an evaluation before receiving a funded account.
The biggest difference between prop firms and retail brokers is how they generate revenue. Retail brokers make money from spreads, commissions, and client losses, while prop firms focus on trader profits, evaluation fees, and internal trading strategies. Some firms rely more on trader-funded evaluations than actual trading, which is why it’s important to understand how a firm operates before joining.
The Main Ways Prop Firms Make Money
Prop firms generate revenue through several streams, including profit splits, evaluation fees, and trading operations. Some firms focus on actual market trading, while others rely more on fees from aspiring traders. Understanding these revenue sources helps traders identify legitimate firms versus those that prioritize fees over trading success.
Profit Splits from Traders
One of the primary ways prop firms make money is by taking a percentage of a trader’s profits. When a funded trader makes a successful trade, the firm takes a cut—typically ranging from 20% to 50%. This model encourages firms to support and develop profitable traders because their success directly benefits the firm.
The profit split structure varies depending on the firm. Some firms offer traders 80% or more of their earnings, while others provide lower splits but offer additional benefits like training or better risk management tools. Firms that focus on profit sharing generally prefer long-term, skilled traders rather than those looking for quick payouts.
Evaluation and Challenge Fees
Many prop firms require traders to pass an evaluation before they can trade with firm capital. This usually involves a challenge fee, which traders pay to prove their ability to trade profitably. If they pass, they receive a funded account; if they fail, the firm keeps the fee.
Some firms rely heavily on these fees, generating more revenue from failed challenges than from actual trading profits. While evaluation fees are a legitimate business model, traders should be cautious of firms that push constant retakes without real opportunities for long-term growth. A firm that profits mostly from evaluations rather than successful traders may not have the best interests of traders in mind.
Trading Desk Profits
Some prop firms operate their own trading desks, where in-house traders use firm capital to trade in various markets. These firms make money through direct market profits rather than relying solely on funded traders. They may engage in strategies such as arbitrage, high-frequency trading, or algorithmic trading.
Firms with strong internal trading operations tend to be more stable because they don’t depend on evaluation fees. These firms often provide better conditions for traders, as their goal is to develop talent that contributes to overall firm profitability.
Data and Technology Fees
Access to professional trading tools, data feeds, and software comes at a cost, and some prop firms charge traders for these services. Fees for charting platforms, order execution tools, and market data subscriptions can add up, providing another revenue stream for the firm.
Not all firms charge for technology, but those that do should offer high-quality tools in return. Some firms include technology fees within their funding program, while others offer optional premium tools for traders who want advanced analytics.
Commissions and Spreads
While prop firms aren’t brokers, some earn money through commissions on trades placed by their funded traders. Depending on their brokerage partnerships, firms may receive a portion of the spreads or commissions paid by traders on each transaction.
This can be beneficial or problematic, depending on the firm. If a firm has low, competitive spreads and commissions, it allows traders to operate efficiently. However, if a firm makes excessive money from commissions, it might encourage overtrading or set unfavorable trading conditions.
Each of these revenue streams plays a role in how prop firms make money. The most reputable firms balance their income sources, focusing on both trader success and sustainable business practices. Traders should be cautious of firms that rely too much on fees rather than actual trading profitability.
Are All Prop Firms Profitable?
Not all prop firms are equally profitable or sustainable. While some firms generate steady revenue from trading profits and funded traders, others rely too heavily on evaluation fees, making them vulnerable to market downturns or shifts in trader demand. A firm’s success depends on how well it balances its revenue sources and manages risk.
Some firms fail because they don’t properly manage risk, especially if they allow traders too much leverage without strict controls. If a firm funds too many high-risk traders who take excessive losses, it can suffer financially. The most successful firms have strong risk management policies in place, ensuring traders follow strict rules to protect firm capital.
Firms that rely too much on evaluation fees rather than actual trading profits may also struggle in the long run. If fewer traders take challenges or if too many traders pass and withdraw profits, the firm may not have a sustainable business model. Traders should research a firm’s reputation, payout history, and business structure to assess whether it’s built for long-term success or just short-term gains.
Red Flags: How Some Prop Firms Exploit Traders
Not all prop firms operate with traders’ best interests in mind. Some prioritize making money from evaluation fees rather than actual trading profits. These firms often market aggressively, pushing traders to retake challenges without offering real opportunities for long-term growth.
One major red flag is excessive challenge failures with no transparency. While prop firms need to filter out unqualified traders, firms that make passing nearly impossible may be more focused on collecting fees than developing talent. If a firm has very few funded traders making withdrawals, it could indicate that their business model depends on evaluation fees rather than trading profits.
Another warning sign is hidden costs and unfair payout structures. Some firms charge extra for data feeds, force traders to meet unrealistic profit targets, or delay payouts with strict conditions. Legitimate firms are upfront about their costs, payout schedules, and risk management policies.
Traders should also watch out for poor risk management rules that seem designed to eliminate traders quickly. If a firm has harsh daily loss limits, tight stop-out levels, or aggressive restrictions on strategies, it may be trying to disqualify traders before they can withdraw profits. A good prop firm provides clear risk guidelines but also gives traders a fair chance to succeed.
Before joining any prop firm, research online reviews, read the terms carefully, and check payout proof from real traders. A legitimate firm should make money from both trader success and responsible business operations—not just from failed challenge fees.
Conclusion
Prop firms make money in several ways, including profit splits from traders, evaluation fees, trading desk profits, and commissions. The most reputable firms balance their income sources, focusing on both trader success and firm sustainability. However, some firms rely too heavily on evaluation fees, making it harder for traders to succeed long-term.
Understanding how prop firms make money helps traders choose the right firm and avoid potential scams. Firms that prioritize actual trading profits and offer fair conditions are more likely to provide long-term opportunities. Before joining a prop firm, research their business model, payout history, and risk policies to ensure they align with your trading goals.
