What is Proprietary Trading: Firms, Payouts & Risks

Ever wondered what it’s like to trade with someone else’s money—but keep most of the profits? That’s the allure of proprietary trading, also known as “prop trading.” It’s one of the fastest paths for aspiring traders to access large amounts of capital, bypass the limitations of personal funds, and grow a performance-based career in the financial markets.

In this comprehensive guide, you’ll learn how prop trading works, the types of firms that dominate the space, real-world compensation models, and the critical risks and rewards involved. We’ll also help you decide if it’s the right career path for you and what to look for in a top-tier firm.

Whether you’re a beginner with big dreams or an experienced trader ready to scale up, this article has the insights you need to get started—or go further.

We’ll draw from expert sources such as Corporate Finance Institute, Investopedia, and Mergers & Inquisitions. Along the way, we’ll link to insider tips like 5 Things to Know Before Joining a Prop Trading Firm and 4 Things Prop Firms Don’t Want You to Know.

Prop trader pointing at an options chain.

What is Prop Trading?

Proprietary trading refers to a financial firm or commercial bank investing for direct market gain rather than earning commission dollars by trading on behalf of clients. In prop trading, the firm uses its own capital to trade stocks, options, bonds, currencies, commodities, or other financial instruments, distinguishing it from other forms of trading, such as hedge funds, which use client funds.

These firms seek to capitalize on the market inefficiencies or trading opportunities using sophisticated strategies that can range from arbitrage and trend-following to high-frequency trading (HFT). Financial institutions, such as brokerage firms and investment banks, engage in proprietary trading using their own capital rather than client funds, aiming to maximize profits and generate significant earnings from investments.

Firms that specialize in prop trading use their own money to trade a wide range of financial instruments including:

Stocks
Options
Bonds
Futures
Currencies (Forex)
Commodities
Cryptocurrencies (in some cases)

The goal is simple: profit from price movements using sophisticated strategies—sometimes powered by algorithms, artificial intelligence, or time-tested manual methods. Since firms are using their own capital, they have skin in the game, which means they are highly selective about who trades for them and how risk is managed.

What Does “Prop” Mean in Trading?

“Prop” is shorthand for “proprietary.” In this context, it means the capital and strategies used belong to the firm itself—not to external investors or clients. This is what sets prop trading apart from brokerage services or asset management.

Brokerages make money through commissions and fees; prop firms make money directly from successful trades. Because of this, they are extremely motivated to train, support, and mentor traders they believe in.

Is Prop Trading Illegal?

No—proprietary trading is not illegal. However, it has been subject to regulatory scrutiny in the past, particularly after the 2008 financial crisis. The Volcker Rule, part of the Dodd-Frank Act in the U.S., was designed to limit banks from engaging in speculative trading with customer deposits.

That said, the rule applies primarily to traditional commercial banks. Most independent prop trading firms are not subject to the Volcker Rule, and they operate legally within regulatory frameworks around the world.

Still, due diligence is essential. Some unregulated or deceptive firms may operate unethically. Always check for transparency, reviews, and terms before joining a firm.

Why Is Proprietary Trading Risky?

Prop trading offers high reward—but it also comes with high risk. When you’re trading large sums of capital, especially with leverage, losses can add up quickly. Common risks include:

Market volatility – sudden swings can wipe out positions.
Leverage – magnifies both profits and losses.
Overconfidence – even experienced traders can fall into emotional traps.
Lack of diversification – concentrating trades in a single strategy or asset class increases exposure.
System failure – tech outages, poor execution, or latency can impact trades.

To mitigate this, prop firms usually implement strict risk management protocols, including daily loss limits, maximum position sizes, and mandatory stop-loss orders.

Is Prop Trading Good for Beginners?

Yes—and no.

Yes, if you’re disciplined, coachable, and eager to learn in a structured environment. Many reputable firms offer training programs, demo accounts, mentorship, and performance-based scaling.

No, if you expect easy money or lack the psychological discipline required. Prop trading is performance-driven. If you’re inconsistent, you may not survive long. That’s why choosing the right firm—and knowing what questions to ask—is critical.

Check out our related resource: 4 Things Prop Firms Don’t Want You to Know.

What is an Example of Proprietary Trading?

Here’s a real-world example:

A firm notices that the price of gold futures is trading at a premium compared to spot prices. A trader executes a calendar spread—shorting the overpriced futures while going long on the spot market, expecting the gap to close.

This arbitrage strategy might seem small in scale, but repeated with volume and leverage, it can be highly profitable.

Other strategies include:

Statistical arbitrage
Options volatility spreads
Momentum trading
Mean reversion
News-based scalping

What is a Proprietary Trading Firm?

A proprietary trading firm is a company that allows individuals to trade using the firm’s money. These firms often recruit and train traders, then fund them based on strategy, performance, and risk profile.

Financial institutions engage in proprietary trading to leverage competitive advantages and maximize profits by using their own funds to trade. This method allows them to take on higher risks, as they are not bound to act on behalf of clients, thereby capitalizing on market information and sophisticated trading strategies.

Most prop firms make money by:

Taking a cut of trader profits
Charging for educational or evaluation services
Growing their own in-house trading desks

Read: 5 Things to Know Before Joining a Prop Trading Firm

Firm Structure and Operations

Proprietary trading firms have a distinct operational framework designed to foster a performance-driven environment.

Hierarchical Structure

A typical prop trading firm’s hierarchical structure consists of:

Senior Management: Responsible for overseeing the overall strategy and direction of the firm. They set the tone for the firm’s trading philosophy and ensure that all operations align with the firm’s goals.
Trading Desk: Comprises experienced traders who manage the firm’s capital and make trading decisions. These traders are the core of the firm, executing trades across various financial instruments to generate profits.
Risk Management: Focuses on monitoring and managing the firm’s risk exposure to ensure optimal returns. This team implements strict risk management protocols, including daily loss limits and maximum position sizes, to protect the firm’s capital.
Research and Development: Develops and implements new trading strategies and technologies. This department is crucial for staying ahead of market trends and continuously improving trading performance.
Back Office: Handles administrative tasks, such as accounting, compliance, and IT support. The back office ensures that all operations run smoothly and

Revenue Models

Prop trading firms generate revenue primarily through the profits generated by active trading. The revenue model is designed to incentivize traders to maximize profits, with profits shared between the firm and traders according to a predetermined profit split agreement.

Where Do Prop Firms Get Their Money?

Sources of funding may include:

Private investors
Profits from in-house trading
Founder capital
Earnings from trader splits
Capital reinvestment from prior years

Reputable firms are self-sustaining, scaling only the traders who deliver consistent returns.

How Much Do Prop Trading Firms Pay?

Let’s break down a typical earnings structure:

80/20 profit split – If a trader earns $10,000 in a month, they keep $8,000, and the firm retains $2,000.
Performance bonuses – Some firms offer $5,000–$7,000 bonuses as milestones.
Scaling capital – As performance improves, access to capital increases, meaning bigger trade sizes and more potential income.

Do Prop Firms Give You Real Money?

Yes. While some use simulated evaluations to test traders at first, all reputable firms ultimately provide real capital once trust is established.

Examples:

Maverick Trading – Offers real capital with a structured ramp-up path.
Topstep – Starts with simulated trading, but moves to real capital upon passing.
FTMO – Uses demo accounts for evaluation, then funds a real account.

What is a Proprietary Trader?

A proprietary trader (or “prop trader”) is someone who trades on behalf of a firm using the firm’s capital. These traders are compensated based on their performance, typically through a profit-split model (e.g., 80% to the trader, 20% to the firm).

Some are independent contractors, others are W-2 employees. Most firms offer flexibility in how you trade, provided you follow their risk management framework.

Prop Trading vs. Retail Trading

Feature	Proprietary Trading	Retail Trading
Capital Provided	Yes (Firm-funded)	No (Self-funded)
Leverage	Higher	Limited
Risk Management	Strict Firm Policies	Trader-Dependent
Education & Support	Professional Training & Mentorship	Self-Taught
Payout Structure	Profit Split	100% Self-Kept

While retail traders keep 100% of their profits, they risk personal capital. Prop traders use firm money, allowing for larger trades with reduced personal risk.

Benefits of Proprietary Trading

Proprietary trading offers several benefits to financial firms, including:

Increased Profits: Prop trading allows firms to retain 100% of the profits generated by trading activities. This can significantly boost the firm’s revenue compared to traditional brokerage models.
Improved Market Liquidity: Prop trading firms contribute to market liquidity by providing a steady flow of buy and sell orders. This helps stabilize financial markets and ensures smoother trading operations.
Enhanced Risk Management: Prop trading firms can manage risk more effectively by using their own capital and implementing sophisticated risk management strategies. This allows them to take calculated risks while protecting their capital.
Access to Advanced Technology: Prop trading firms often invest in cutting-edge technology, providing traders with advanced tools and platforms to execute trades. This technological edge can lead to better trading decisions and higher profitability.
Talent Attraction and Retention: Prop trading firms can attract and retain top trading talent by offering competitive compensation packages and opportunities for career growth.

How Does Prop Trading Work?

The typical prop trading setup looks like this:

The Firm Provides:

Capital
Trading platform/software
Risk management tools
Training and mentorship

The Trader Provides:

Trading strategy
Compliance with risk rules
Consistency and performance

In return, profits are split—often 70/30 or 80/20 in the trader’s favor. Some firms also offer performance bonuses, especially after initial milestones are hit (e.g., after earning the first $5,000 or $7,000 in profit).

Types of Proprietary Trading Strategies

Prop traders use various trading strategies to profit from market moves.

1. Options Trading

Options strategies include spreads, iron condors, and volatility-based trades.

2. Day Trading

Short-term trades capitalize on intraday market movements.

3. Swing Trading

Positions are held for several days to weeks, capitalizing on short-term trends.

4. Arbitrage Trading

Traders exploit price differences between assets for low-risk profits.

5. Market Making

Firms provide liquidity by continuously quoting bid-ask prices.

Do Prop Traders Make Good Money?

Yes—if they are good. According to Mergers & Inquisitions, successful traders can earn anywhere from $50,000 to $250,000+ annually. Top performers at established firms can even make seven figures.

Factors influencing income:

Profit split ratio
Instruments traded (e.g., SPX options may yield more than EUR/USD scalping)
Volume and trade frequency
Risk management
Performance bonuses

What is a Proprietary Trader Job Description?

Here’s a typical job breakdown:

Trade firm capital across approved markets (stocks, options, forex, futures)
Follow firm rules and compliance guidelines
Maintain a trade journal or performance tracker
Participate in ongoing education or mentorship
Adjust to real-time market conditions
Communicate with risk managers or mentors

Hours vary by firm. Some offer full-time salaried positions, while others operate on a flexible part-time basis with performance-based scaling.

Is Prop Trading a Good Career?

For the right person, it’s one of the most exciting, performance-driven careers out there.

How Do You Become a Proprietary Trader?

Here’s a step-by-step path:

Research firms – Look at funding models, risk rules, and reputation.
Apply – Most firms have a structured interview and screening process.
Train – You may need to complete training modules or pass an evaluation.
Demo trade – Many firms start traders on a simulated platform to test strategies.
Scale up – With consistent performance, you can access more capital and earn more.

Some firms require a small refundable deposit to align incentives and show commitment.

What Counts as Trading for a Company?

Any activity that uses internal capital to earn a direct profit qualifies as prop trading. That includes:

Equity long/short strategies
Options spread or volatility trades
Forex scalping or swing trading
Futures trend-following
Crypto arbitrage (at select firms)

Can You Make a Living Trading for a Prop Firm?

Absolutely. Many traders do—especially once they:

Hit consistent monthly profitability
Stick to their trade plan
Avoid emotional decision-making
Use leverage wisely
Follow strict risk rules

It’s not instant, but with time and effort, many turn it into a full-time career.

How Do You Trade for a Prop Firm?

Choose a reputable firm
Complete the application and training process
Meet risk and performance guidelines
Get funded and begin trading

Firms often assign mentors or risk managers to help along the way.

What is the Best Prop Firm for Trading?

When evaluating a prop firm, consider these criteria:

Liquidity

Does the firm allow high-frequency or large-size trading?
Are there restrictions on instruments?

Tech

Does the firm offer fast execution, reliable software, and robust charting tools?

Evaluation Process

Is there a transparent and fair evaluation?
Are the rules consistent and publicly stated?

Education

Is training provided?
Are there mentoring opportunities?

Funding

What capital is available at start?
How does capital scale with performance?

Profit Share

What is the trader/firm split?
Are bonuses available?

Instruments

Can you trade stocks, options, futures, forex, or crypto?

Longevity

Is the firm established with a track record of success?

Best Prop Firm #1: Maverick Trading

Longevity: 25+ years in operation
Instruments: Stocks and options
Training: Extensive training and mentoring
Funding: Real capital, performance bonus

Learn More: Maverick Trading’s Application Process

Best Prop Firm #2: Topstep

Instruments: Futures
Evaluation model with simulated trading
Good for beginners, clear scaling path

Best Prop Firm #3: FTMO

Instruments: Forex and CFDs
Strong global presence
Evaluation with performance milestones

Best Prop Firm #4: The5ers

Instruments: Forex
Good scaling program
Low starting capital requirement

In Summary: What is Prop Trading?

Proprietary trading empowers traders to earn money by using a firm’s capital, not their own. Traders who perform well can earn generous profit splits, scale capital access, and even qualify for bonuses.

The rewards are real—but so are the risks. Success requires discipline, consistency, and a supportive firm structure.

Frequently Asked Questions About Proprietary Trading