What is the Actual Business Model of Trading Prop Firm Companies?


Lately, prop firm companies have appeared here and there.
Basically, you can pay to receive 5-6 digits of a trading account, prove yourself a consistently profitable trader by taking the evaluation, then be given “live” trading account (from $10,000 to $300,000), and any profit will be split with you (you get 70-85%).

But nobody actually knows about how they work since there isn’t any insider info coming out yet.
People say they actually made money by collecting registration fees, and the profit split to profitable traders is actually other people’s registration fees, since the number of profitable traders actually only count for 1%-ish. Something like a money game (variation of a Ponzi scheme?).

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The prop firm companies are funded by venture capital who are just there to make a profit on their investment.

Having a series of barriers to entry for potential traders ensures a reasonable “business model” from each successful trader as well as an income stream for “training” for each unsuccessful trader.

Successful traders are kept so long as they are successful and there is a steady flow of new successful traders and revenue from unsuccessful traders.

Can’t make a general statement about these. It’s possible there’s some scams, but the ones I’m thinking of are “legit” in the sense they try to do what they state they’re trying to do. The business can be simplified to – trading has a lot of fixed cost – build a common company that amortizes the cost across multiple traders/trading teams. Then each trader will use their own strategy to trade. Because the strategies are independent, there’s a sense the aggregate risk will be reduced. Only keep the traders that seem to know what they’re doing/and somewhat consistently have a positive return. The traders provide the strategy and the labor, while the firm provides the book capital and the supporting services; so there’s some split of both the risk and the profits.

Hey there. Prop firm management here.

It’s a great question and transparency is key to working with a prop firm. You’ve made some somewhat correct and somewhat incorrect assumptions here and I’ll speak in generalities for you.

First, it’s important to understand that only a small portion of firms fund accounts with real money. Many firms keep traders on a demo, even when they pass the evaluation. This means they only have to pay out the winners from the revenue collected as registration fees. (It also creates a somewhat adversarial relationship where the trader and firm are at odds.) As a result, these firms count on the fact that a small number of traders will pass and an even smaller number will take a payout. So, they often create programs with many phases and complex rules to minimize their payout exposure. Ponzi scheme? Meh, debatable. Misaligned with the trader? Probably.

On the other hand, a handful of firms fund accounts with real money. Our interests are aligned. If a trader passes or takes a withdrawal, these firms get to truly celebrate with their traders, because with money on the line, if a trader wins, everyone wins. Now, that’s not to say that the registration fees are not a revenue stream. The fees are an important part of maintaining a sustainable long-term prop firm business. But when accounts are funded with real money, the revenue from (1) registration fees and (2) the firm’s percentage of payouts tend to be more balanced.

… Not to mention, real money firms can then create programs with simple, straightforward trading rules and just one phase with no time limits (ahem), programs which overall are a better proposition for the trader in many ways.

(I’ll also add that the percentage of profitable traders is more than 1%.)

Hope that helps a little!