Prop firms are the most fascinating reality of financial markets today. They use their own capital to generate profits through strategic trading. There are traditional brokers earning commissions by managing client funds, but prop firms take on the full risk and reward of trading their own funds.
This industry has been growing remarkably in recent years. This is because retail traders are growing in huge numbers, and prop firms are introducing innovative business models by reading between the lines. On the professional end of prop trading, firms use the most advanced strategies like high-frequency trading, arbitrage, and market-making to exploit inefficiencies and liquidity gaps.
These strategies are strategies that only work if trades are executed in milliseconds & thus, the prop firms can capitalize on the smallest of price discrepancies.
There is an important duality to the concept of prop firms. Retail-focused prop trading firm models generate revenue from trader’s evaluation models & institutional prop firms profit from sophisticated trading strategies. This blog highlights the versatility and profitability of prop firms, along with giving you an eagle’s eye view into the reality of prop firms.
Breaking down Prop Firms: What every Trader should know
A proprietary trading firm, or a prop firm, is a financial company that trades using its own capital rather than managing funds for clients. Prop firms directly generate profits or losses from the market profits by using strategies and technology.
Prop firms work across diverse financial markets, including stocks, commodities, currencies, and derivatives; mostly retaining 100% of the profits from the successful trades. With this model, they can take higher risks without external accountability. This accountability makes them both highly profitable and volatile.
What are the core functions of a prop trading company?
- Funding capital: They invest their own funds in financial instruments to make money from returns.
- Risk management: They provide sophisticated systems to manage exposure and protect capital.
- Trading strategies: They use methods arbitrage, scalping, algo-trading, and high-frequency trading for gaining high profits.
- Technology: They use the best software for market analysis and executing trades speedily, which is what traders need.
- Offering traders growth: Recruit and train skilled traders to execute profitable strategies on the firm’s behalf.
What are the differences between Prop Firms & Traditional Investment Firms?
Let’s dive deep into the differences between prop firms and traditional investment firms.
| Aspect | Prop Firms | Traditional Investment Firms |
|---|---|---|
| 1. Capital source | The firm’s personal capital is used for trading. | They manage and invest clients’ capital. |
| 2. Generating Profits | Prop firms generate profits directly through the market. | They earn commissions and fees through managing the clients’ accounts. |
| 3. Risk bearing | The whole responsibility of risk is of the prop firm. | Clients bear the financial risk. |
| 4. Regulatory oversight | Prop firms generally have fewer regulatory requirements as they don’t handle client funds. There may be scope for increased regulations in the future. | As they handle client funds, they have to follow strict risk protocols to protect client assets. |
| 5. Client Interaction | There is typically no client interaction. | There is a regular communication protocol between the firm and the client to understand & align the client’s financial goals. |
| 6. Trader Funding | They provide capital to traders and retain a specific portion of the profits. Traders can also practice trading by using virtual funds in simulated markets. | Traders use the specific amount of funding assigned to them, by the traditional investment firm. |
| 7. Profit Splits | Profits are shared between the firm and the trader based on a pre-determined agreement. | Traders keep their profits. |
| 8. Loss Responsibility | Losses may be shared with the firm or covered by the firm’s capital. But funded accounts / demo accounts are cancelled for the trader who passes a certain loss threshold. | The traders are responsible for covering up for their losses. |
| 9. Trading Focus | Focus on short-term as well as long-term profits. This can include day trading as well as swing trading strategies. | The traders have to focus on long-term growth, which requires ultimate patience and an understanding of the markets. |
| 10. Buy-sell Power | Prop firms generally allow high buy-sell power. This magnifies the amount of profits as well as losses. | They offer lower leverage, reducing potential gains and losses. |
| 11. Trading Style | Active management of positions with frequent monitoring and quick decision-making. | Portfolio management, fundamental analysis, and market trend checking. |
| 12. Compensation | Traders are transparently compensated based on their skills and profit-making ability. The majority of the time, they’re compensated with lucrative profit splits. | Traditional firms do not offer profits but salaries and specific figures of incentives for motivating the traders working under them. |
| 13. Independence | Modern prop trading provides greater independence in working hours and location. | Traders have independence and control over their trading decisions, but mostly are organized by the trading firms in a typical job way. |
| 14. Training & Support | Prop firms generally provide structured training, mentorship & a team environment to traders. | Traders operate independently without any formal guidance. |
| 15. Access to Tools | Traders have access to advanced trading platforms, tools, and infrastructure. | Traders have limited access to tools. But, this depends more on the level of the trading firm they’re working with. |
| 16. Risk to Personal Funds | No risk to personal funds as firms provide capital. There is zero risk to personal funds as traders do not have to use their own funds to trade. | Traders working with trading firms do not have their own capital and mostly have salaries. They are limited by personal capital and trading resources. |
| 17. Market Participation | They can engage in market-making, arbitrage trading as well as make use of short-term price movements. | They mostly focus on traditional investment strategies and diversify portfolios to limit risk. |
| 18. Operational Aspects | They simplify operations by not handling customer deposits. | Their operations are a bit complex due to managing and safeguarding client funds. |
| 19. Client Attraction | These firms attract experienced and novice traders who want to leverage their trading expertise without capital requirements. | These Firms take on new clients and hire new traders for managing their capital as required. |
| 20. Primary Goal | They invest to directly reap profits from the market. | They trade to earn commissions. |
How do Prop Firms Make Money?
Prop firms can generate revenue in many ways with smart strategies and models. Let’s have a detailed look at how they make money and what each strategy means:
Direct market gains from prop trading
Prop firms primarily earn profits by trading with their own capital. They use strategies like arbitrage, news trading, or HFT to use market inefficiencies in their favour. For example, a prop firm can use algorithms to identify and make use of price discrepancies across different markets. They buy low and sell high across different markets to generate profits.
With this strategy, prop firms can achieve significant returns. For example, a firm using HFT can execute thousands of trades per day and generate great profits from even small price movements.
Fees from trader evaluation programs
There are many skilled traders in the markets, and many prop firms offer funded trading accounts to them after they pass a series of evaluations. This model generates revenue through evaluation challenges (in which most traders don’t pass easily) and monthly subscriptions. Traders can pay to use these evaluations to their advantage and if they fail, the firm keeps the fees. trader2B, a prominent prop firm, also refunds the evaluation fees once a trader passes the evaluation challenge and makes their first profit.
With a thorough analysis of 300,000 prop trading accounts, a study found that only 7% of prop trading accounts received payouts. This again highlights that the evaluations are a good playground for traders, but they aren’t that easy to pass through.
Income from trade commissions
Some prop firms earn profits by charging commissions on spreads for trades executed by their funded traders. This model is similar to traditional brokerage firms but is also used simultaneously with other revenue streams.
Prop firms can charge a small commission per trade or mark up the spread between bid and ask prices. For example, if a trader executes 100 trades per day, the firm can earn a large amount from these commissions alone.
Market-making activities
Prop firms also earn with market-making activities by providing liquidity to markets. They profit from the difference between buying and selling prices, known as the spread. Non-bank liquidity providers, including prop firms, generated $26.7B in revenues in 2024. This is a major income source for prop firms.
Interest on dormant capital
Prop firms can also earn interest on their capital, which is not being used at all. This is a great way to make a passive income stream that is in sync with their trading profits. Firms with a large capital balance have a great amount of interest income, especially in the case of high-interest rate environments.
Exchange Volume Rebates
Some prop firms receive rebates from exchanges for generating high trading volumes. These rebates are also an additional income. The exact amount of revenue from rebates depends widely on trading volume and exchange agreements of different stock exchanges. However, it can significantly increase a firm’s overall profitability.
If you want more information on rebate rates of various stock exchanges, we’ve listed the sources below:
| Stock Exchange | Rebate Rates for Adding Liquidity | Rebate Rates for Removing Liquidity | Notes |
|---|---|---|---|
| NYSE Arca | Up to $0.0045 per share (LMMs) | Fees apply, e.g., $0.0029 per share | Depends on the variety of tier and order type (source: https://www.federalregister.gov/documents/2021/06/03/2021-11611/self-regulatory-organizations-nyse-arca-inc-notice-of-filing-and-immediate-effectiveness-of-proposed) |
| NASDAQ | Up to $0.0030 per share | Fees apply, e.g., $0.0030 per share | Rebates depend on liquidity provision and order type. They do not have a straightforward fee structure, as they often focus on rebates for market makers and liquidity providers. You can check more in detail at: https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing |
| Cboe BZX | – | Fees apply, e.g., $0.0030 per share | Rebates are based on liquidity provision and market conditions. (source:https://cdn.cboe.com/resources/fee_schedule/2025/Cboe-Equities-Exchanges-Fee-Schedule-Updates-Effective-January-2-2025.pdf) |
| London Stock Exchange (LSE) | Vary by market segment and participant type. | Vary by order type and market segment, such as a minimum charge per order. | Rebates vary by market segment and participant type. |
| Euronext | Up to 0.20 bps | The Fees vary by trade type, such as 0.15 bps for block trades and 2 bps for NAV trades. | Rebates are tiered based on liquidity provision. |
| Hong Kong Stock Exchange (HKEX) | – | Fees apply, e.g., HKD 0.42 bps for each trade. Special fees for ETP market makers: 0.20 bps | The rebate rates are not specifically mentioned, but applied from June 2025, the liquidity provision incentives could be a part of market initiatives. (source: https://www.hkex.com.hk/News/Market-Communications/2025/250221news?sc_lang=en) |
| Singapore Exchange (SGX) | They differ by trade type, i.e. a % of traded value. | – | Rebates vary based on market conditions and liquidity provision. |
| Australian Securities Exchange (ASX) | May vary based on specific programs or market conditions | Vary by trade type, such as 0.04 to 0.31 basis points per trade, capped at $75 plus GST. | Not specified in the fee structure (https://asxonline.com/content/dam/asxonline/public/documents/schedule-of-fees/asx-trade-markets-participant-and-trading-schedule-of-fees.pdf) |
Proceeds from Educational and Mentorship Services
Prop firms also offer educational resources like trading courses and mentorship programs to aspiring traders. These services are always sold for a fee and provide another revenue stream to the prop firm. Some firms can earn big revenues from this if they have aspiring traders willing to improve their skills.
Income through Strategic Partnerships and Affiliations
Prop firms can form partnerships with other financial institutions or technology providers to enhance their trading capabilities. These partnerships are often a way to lead to additional revenue streams with referral fees or technology licensing.
What are the Profit-Sharing Mechanisms in Proprietary Trading Firms?
Proprietary trading firms have different kinds of profit-sharing structures to motivate traders and ensure a viable business model. Below is a comprehensive breakdown of all profit-sharing models that exist in modern prop trading:
Fixed profits
Fixed percentage of allocations have always existed in prop firms, where traders get a specific set percentage of the profits they earn. For example, trader2B offers 95% profits to its traders. Sometimes, these ratios also differ for new traders and experienced traders in other prop firms. This way, both the firm and the trader benefit and get the security they need.
Tiered profit sharing
These compensation structures is based on a few specified performance targets or the management of large accounts. For example, a firm might agree to split profits 50/50, in the first phase. But as you grow and show improvement, the profit split could also increase to 80/20. This design motivates the trade to grow and also, does not cap their expectations with a specific percentage.
Performance-based incentive plans
These plans are, in essence, based on a trader’s performance. Traders who reliably complete or exceed profit targets can negotiate the profits they want. Many times, this negotiated profit can be up to 95% as well. As this model ties closely to performance, traders always need to optimize their trading skills.
Salary plus bonus model
Some prop houses offer a basic salary to their traders and bonuses that are linked to their performance. With a stable income and additional bonuses, many traders gear up and move above their performance levels. This model resembles a job, so it is less popular but perfect for traders looking for financial security.
Equity plans
This model is rarely seen in prop trading firms, but equity interest programs are chances for talented traders to become firm owners. This strategy is usually used for employees who are outstanding and contribute to the company’s growth, both financially and ethically.
On an ending note,
Prop firms are ruling the financial markets today by leveraging their capital & advanced tech. Unlike traditional investment firms that rely on client funds, prop firms take the full responsibility of risk and reward. Due to this reason, prop firms become highly profitable and volatile.
For traders, prop firms are a unique opportunity, with capital and the best trading tools to get lucrative profits. Whether you’re a trader looking to get funded or an investor who wants to understand prop trading, we hope this blog has come through on explaining to you how prop firms make money!
