By Benjamin Roure L'Hermitte
What is prop trading? It is trading that a firm does with its own money and for its own account, with no client behind the order: if the trade wins, the firm keeps the gain, and if it loses, the firm takes the loss. The term is short for proprietary trading. In recent years the same words have also been used to sell something else: a paid evaluation followed by a demo account, offered to retail traders by online companies. Those are two different businesses, and nearly all the confusion around the subject starts there.
- In the strict sense, a firm trades its own capital and carries the risk alone.
- In the sense you see on social media, it means online prop firms: a simulated account at FTMO and at Topstep, according to their own pages.
- The deciding test: who loses real money if the trade goes wrong?
- The first sense is closely regulated: generally banned for US banks, ring-fenced into subsidiaries in France above certain thresholds, and subject to €750,000 of initial capital for an authorized EU investment firm.
Type the term into YouTube and you get screenshots of payouts. Look it up in a statute and you land on banking structural reform. Both are talking about prop trading without talking about the same thing, which is awkward when you are about to pay for an evaluation thinking you are joining the profession the statute describes.
This article sticks to the question of what the term means. It covers prop trading in the strict sense, how such a firm actually earns its living, why banks had to step back from it, what online offers sell under the name, and how to tell which one you are looking at. The step-by-step path through an evaluation belongs in our guide to prop firm trading.
The original meaning: an order with no client behind it
The legal texts are clearer than social media vocabulary. Article 4 of the EU's MiFID II directive defines dealing on own account as 'trading against proprietary capital resulting in the conclusion of transactions' in financial instruments. US law, at 12 U.S.C. § 1851, speaks of 'engaging as a principal for the trading account' of the institution.
Everything hangs on that word, principal. A broker is an intermediary: it passes your order along and the result is yours. A fund manager decides, but the money belongs to the fund's investors. A prop trading firm has nobody else in the transaction: it is the counterparty, and its balance sheet absorbs the result. Nobody placed an order with it, nobody holds it to a mandate, and nobody will cover its loss.
| Who | Whose money | Where the firm's revenue comes from | Who loses if the trade goes wrong |
|---|---|---|---|
| Prop trading firm | Its own | The result of its own positions | The firm |
| Broker | The client's | Commissions and spreads charged to the client | The client |
| Investment fund | The investors' | Management fees and, often, performance fees | The investors |
| Online prop firm | Simulated capital at FTMO, and at Topstep up to the Express Funded Account, according to their pages | Evaluation or subscription fees; trades may be copied to a live platform, the FSMA writes | The participant loses their fees, the account result being simulated |
How a real prop trading firm makes money
Forget the picture of a trader betting on the direction of gold. At the big names, the core of the business is often market making. Optiver, operating since 1986, says it continuously quotes buy and sell prices 'using our own capital and advanced technology'. MiFID II gives the legal definition of a market maker: someone who holds themselves out, on a continuous basis, as willing to buy and sell against their own capital at prices they set themselves.
Take a made-up example, just for the mechanics. A market maker shows 100.00 to buy and 100.02 to sell. If it buys 1,000 shares at one and sells them at the other, it collects 20 of spread before costs. Nobody asked it for an opinion on the stock. Its risk lies elsewhere, in inventory: if it gets stuck with those 1,000 shares and the price drops 0.10, the loss is five times what the round trip was meant to bring in. The job is repeating that tiny edge a huge number of times without being caught by the big move.
This model needs volume and machines. Jane Street, which describes itself as 'a global liquidity provider and trading firm', says it trades on more than 200 electronic exchanges and other venues, and Jane Street's quantitative trader job posting mentions proprietary models and over a million trades on busy days. That is a long way from one screen, one mouse and a hunch.
It is a harsh field even among professionals. The study by Baron, Brogaard and Kirilenko released by the CFTC followed high-frequency trading firms in the E-mini S&P 500 contract over two years from August 2010. Revenue concentrates among a small number of players, the authors describe a winner-takes-all structure, and new entrants earn less and exit more often. That holds only for this market and period, and it is a working paper. The broader point still helps: in the strict sense, prop trading is an industry of capital, speed and engineers.
Why banks had to step back from it
Prop trading long lived inside banks too, alongside their customers' deposits. In the US, the Volcker rule, as the Federal Reserve presents it, 'generally prohibits banking entities from engaging in proprietary trading'. The final regulations date from December 10, 2013, with conformance due by July 21, 2015. The law keeps exceptions: US government obligations, market making, hedging and trading on behalf of customers. That is where the argument lives, because the same purchase of securities can count as permitted market making or as a prohibited bet on the balance sheet.
France preferred ring-fencing to a ban. The law of July 26, 2013, in its original wording, requires an institution above thresholds set by decree to house its own-account trading in a dedicated subsidiary, with exceptions for client services, hedging and market making among others. That subsidiary is barred from the high-frequency trading subject to the tax in the French general tax code, and from forward transactions on agricultural commodities.
Outside banking, the activity stays possible and supervised. In the EU, Article 9 of Directive (EU) 2019/2034 sets initial capital of €750,000 for an investment firm authorized to deal on own account. Keep the order of magnitude in mind: that is what lawmakers expect from someone truly exposed on their balance sheet, while an evaluation subscription costs tens of dollars a month.
Online prop trading: same words, different product
The confusion comes from borrowing the name. The warning from Belgium's FSMA, dated March 7, 2024 and written in French, describes firms that, alongside their own-account trading, offer consumers a fictitious investment game in which, it says, the consumer does not really trade. The press release from Italy's CONSOB, dated July 8, 2024, speaks of a kind of finance video game and reports complaints about tests allegedly contrived to push players to try again, and about the failure to share alleged profits. These are general warnings: neither names a firm.
The firms say so too, in their own words. FTMO's trading objectives page states that all its accounts are 'demo accounts with fictitious funds'. Topstep's program page refers to a simulated environment for part of the path, and Topstep's pricing page listed a subscription of $49 to $199 a month on the standard path in November 2026, depending on account size. There is no confession in any of this: it is in plain sight, which beats an advert that only ever talks about capital.
Topstep also publishes its results for 2025, and they deserve a close read: 16.8% of Trading Combines initiated were completed, 51.8% of participants advanced to the Funded Level at least once, 33.3% of participants at that level received a payout, and 0.71% of those on an Express Funded Account were called up to a Live Funded Account. Read the denominators carefully. The first figure counts evaluations and the second counts people: the gap tells you the same person often tries several times, which fits a subscription model. The last answers our question: on that page, fewer than one participant in a hundred reaches what the firm calls a live account. These figures hold for Topstep only.
The law, for its part, has not settled the model. In August 2023, the US regulator CFTC sued the company behind My Forex Funds for fraud and obtained its receivership. In May 2025, according to law firm Willkie Farr's analysis, a New Jersey judge dismissed the case with prejudice and awarded fees against the agency, after a court-appointed special master found false representations on its part. That case neither clears the industry nor condemns it: the agency's own conduct is what brought it down.
To compare the firms themselves, we keep a list of rated prop firms and an independent prop firm ranking, and our article on choosing a prop firm says what to read in a rulebook.
Three questions to tell what you're looking at
- Who pays whom? A trading firm that hires you pays you, and takes the risk of being wrong about you. If you are asked for fees before your first trade, you are a customer, not an employee.
- Is the account real? Look for demo, simulated and fictitious at the bottom of the pages and in the terms. If they are there, the advertised capital is a unit of account, not money placed on a market.
- What happens when it goes wrong? In the first sense, a firm loses its money. On an evaluation, you lose your fees and access to the account, sometimes on a single crossed threshold: the daily loss limit and the trailing drawdown are the two to understand first.
None of these answers rules an offer out. A paid simulated account may suit you perfectly well if you know what you are buying: a framework, imposed limits, and a chance at a share of the result. The trouble starts when you think you have been hired. And if the person interests you more than the activity, our article on what a prop trader is covers the job, the status and the pay.
Where your trading journal fits in
A firm trading its own balance sheet cannot ignore what each activity costs it. On an evaluation account, that reflex is often missing: you watch the displayed balance, and rarely add up what you paid to get it. Tradoshi's Prop Firm screen sets what you spent on evaluations, activations and resets against what you actually received, and checks your closed trades against your firm's rules. It does not tell you what to trade: it stops you telling yourself a story about your results. The method for staying inside those limits over time is in our guide on passing a prop firm challenge.
Frequently asked questions
Are prop trading and a prop firm the same thing?
Not necessarily. Prop trading is the activity of a firm trading its own capital. A prop firm, as the term is used online, usually sells a paid evaluation and then access to a simulated account, according to FTMO's and Topstep's pages. They share a name, not a business model.
Is a retail trader using their own money doing prop trading?
They are trading for their own account, but the term normally refers to a firm or someone acting for it. A retail trader is simply a retail trader, and is not subject to the same rules as an investment firm.
Is prop trading legal?
In the strict sense yes, within a framework that depends on the country and the institution: the Volcker rule for US banks, the 2013 law in France, MiFID II and Directive 2019/2034 in the EU. For online offers, the FSMA and CONSOB have issued warnings, and the question has to be checked country by country.
Can banks still do it?
In the US it is generally prohibited, with exceptions such as market making, hedging and trading on behalf of customers. In France, the 2013 law, in its original wording, requires a dedicated subsidiary above thresholds set by decree.
Is prop trading a scam?
In the strict sense, no: it is an old, regulated profession. For online offers, the words alone are not enough to judge. CONSOB reports complaints about tests and unshared profits, the FSMA describes a fictitious game, and some firms publish their numbers. Each firm's terms still have to be read.
How is it different from a hedge fund?
The money. A hedge fund manages its investors' capital and earns fees. A prop trading firm commits only its own and keeps the result. The strategies can look alike, but the party losing money on a mistake does not.
How much capital does it take?
For an investment firm authorized in the EU to deal on own account, the initial capital required is €750,000, under Article 9 of Directive 2019/2034. Access to an online evaluation is a different world: at Topstep, the subscription ran from $49 to $199 a month in November 2026.