What Is Prop Trading?

The traditional meaning

For decades proprietary trading meant banks and specialist firms trading their own money, with employed traders paid a salary and a bonus. Access required a job. Those firms still exist, mostly in futures and equities, and they hire a few hundred people a year worldwide.

The online model

Around 2015 a new kind of firm appeared, offering anyone with a computer a route to trade a large account after passing a test. The firm charges a fee for the test, which is the evaluation or challenge, and the fees from the many who fail fund the payouts to the few who pass. The trader never risks more than the fee. The firm never risks more than the payouts it chooses to make, because the funded account is usually simulated and the firm decides how, or whether, to hedge the positions in a real market.

The appeal

• A 100,000-dollar account for a fee of a few hundred dollars, with no need to save that capital.
• A capped downside: the most you lose is the fee.
• A profit split of 80 percent or more on a funded account.
• Structure: the rules force the discipline most self-funded traders lack.

The cost

Most challenges fail. The rules that make the model work for the firm, daily loss limits, drawdown caps and time limits, are the rules that make it hard to pass, and the fee is usually not refunded on a breach. A trader who repeatedly attempts challenges can spend thousands. Course 3 exists so that you understand the rules before you pay for one.

Key takeaways

• Prop trading is trading a firm's capital for a share of profit.
• Online prop firms sell evaluations; passing earns a funded account with a profit split.
• Your downside is the fee; the firm's is the payouts it makes.
• Most evaluations fail, so understand the rules first.