Understanding the Business Model of Prop Firms

May 18, 2023
Mins. to Read

Unveiling the Secrets of Proprietary Trading Firms: How They Make Money

Are you intrigued by the inner workings of prop firms and their revenue generation? With the rapid expansion of this industry, traders often question the legitimacy and business models of these firms. In this informative article, we aim to demystify the world of prop firms by exploring their two primary revenue streams: the challenge model and the profit split model. From traders participating in paid trading challenges to successful traders receiving funding, we'll delve deep into the realities of prop firms.

Proprietary trading firms, also known as prop firms, empower traders to utilize their capital for trading in financial markets. These firms generate revenue by claiming a percentage of the profits earned by traders using the firm's capital. Our comprehensive guide will uncover the diverse avenues through which prop firms generate income and shed light on the potential advantages and disadvantages of collaborating with them.

By delving into the world of prop firms and unraveling their revenue-generating strategies, you'll acquire valuable knowledge to make informed decisions. Collaborating with a prop firm can unlock new possibilities for traders aiming to expand their horizons.

The Challenge Model

Proprietary trading firms employ various strategies to generate income, and one prominent approach is the challenge model. Under this model, traders willingly participate in a trading challenge by paying a fee. The challenge typically spans a predefined period, like a month, during which traders are allocated a specific amount of capital for trading purposes. At the challenge's conclusion, the trader who achieves the highest return on their capital is not only rewarded with their fee refunded but is also offered a coveted spot within the firm.

This unique model enables prop firms to derive revenue from traders who may not have been profitable initially. Simultaneously, it offers traders the opportunity to showcase their skills, potentially securing a position at the firm. Nonetheless, the nature of this model can influence traders to adopt a more conservative approach, as there's no guarantee of securing a spot at the firm, even if they achieve profitability.

By delving into the workings of the challenge model, you'll gain valuable knowledge about prop firms' revenue streams and the dynamics that shape traders' incentives. Participating in a prop firm challenge can unlock profit opportunities and propel traders towards success.

The Profit Split Model

Proprietary trading firms employ a second method to generate revenue known as the profit split model. Under this model, successful traders are provided with a specific amount of capital to trade, and the firm claims a percentage of the profits earned. Typically, this percentage falls within the range of 50-80%. For instance, if a trader generates $100,000 in profits, the firm's share would amount to $50,000-$80,000.

This profit-sharing approach enables prop firms to generate income without exposing their own capital to risk. Simultaneously, it grants traders access to substantial trading capital that they may not have otherwise. However, it's worth noting that this model can influence traders to adopt a more cautious trading approach. As their earnings increase, so does the firm's share of profits, potentially reducing traders' inclination to take on higher risks.

Potential Benefits and Drawbacks

Collaborating with a prop firm offers traders enticing opportunities, including access to substantial capital and invaluable resources. However, it's important to consider the potential drawbacks that come with this partnership. Here, we explore both the advantages and disadvantages of working with a prop firm, providing you with a comprehensive understanding.

Advantages of Working with a Prop Firm:

  1. Access to Significant Capital: Joining forces with a prop firm grants traders access to sizable trading capital that may otherwise be out of reach.
  2. Valuable Resources: Prop firms provide traders with a wealth of valuable resources, such as cutting-edge technology, advanced trading tools, and expert guidance, bolstering their trading potential.

Drawbacks of Working with a Prop Firm:

  1. Profit-Sharing Model: One notable drawback is the profit-sharing model, which can reduce traders' incentives. Traders must share a portion of their profits with the prop firm, potentially impacting their overall earnings.
  2. Stricter Rules and Regulations: Traders may face more stringent rules and regulations when working with a prop firm, limiting their trading flexibility and requiring adherence to the firm's specific strategies and guidelines.

Considerations Regarding Costs and Control:

  1. Cost of Access: Traders should be aware of the costs associated with accessing the resources provided by prop firms. Over time, these costs can accumulate and eat into a trader's profits.
  2. Trading Control: Working with a prop firm may mean traders have less autonomy over their trading decisions. They might be obligated to follow the firm's rules and strategies, potentially limiting their individual trading style and preferences.


Proprietary trading firms capitalize on revenue generation through two primary models: the challenge model and the profit split model. These models involve prop firms taking a percentage of the profits earned by traders who utilize the firm's capital. While collaborating with a prop firm can grant traders access to substantial capital and invaluable resources, it's crucial to consider the potential drawbacks, including the associated costs and the profit-sharing arrangement. To make an informed decision, traders should carefully assess the pros and cons of partnering with a prop firm.

By thoroughly evaluating the potential advantages and disadvantages of collaborating with a prop firm, traders can make well-informed decisions that align with their trading goals and preferences. Prop firms offer opportunities for growth and resource access, but careful deliberation is essential to ensure a mutually beneficial partnership.

Subscribe to Prop Choice

Stay up to date with Prop Firm industry reviews and collections.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.