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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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!
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