Prop Firm
A company that provides trading capital to retail traders who pass an evaluation, splitting profits between the trader and the firm.
Definition
A prop firm (proprietary trading firm, in the retail context) is a company that offers traders access to a funded trading account after they pass a skill evaluation. The trader pays a fee to attempt the challenge; if they pass, they receive a simulated or real-money account and keep a percentage of any profits they generate. The firm's revenue comes from two streams: challenge fees from the majority of traders who do not pass, and the firm's share of the profits from those who do. Retail prop firms are mostly unregulated — they are not brokers and operate outside FCA, CFTC, and SEC oversight.
Example
Why It Matters
Understanding the prop firm business model changes how you evaluate offers. The cheapest challenge fee is not always the best value — firms with low fees and low profit splits can extract more from successful traders than firms with higher fees and higher splits. The regulatory gap also matters: if a firm fails (as several have in 2024-2025), traders have little recourse because there is no investor-protection scheme covering prop firm deposits.