What Is Prop Trading? A 2026 Guide to Proprietary Trading Firms

Proprietary trading (prop trading) is when a firm trades financial instruments with its own capital to generate profit, rather than executing trades on behalf of clients. In the modern “remote prop firm” model that dominates since ~2015, the firm gives qualified traders access to a trading account – usually simulated – and pays them a share of the profits they produce, typically 70–95%.

Two distinct things get called “prop trading” today:

• Institutional prop trading – hedge funds, market-makers, and high-frequency firms (Jane Street, Citadel Securities, Optiver, Jump Trading) that employ traders on salary-plus-bonus to trade the firm’s own balance sheet.
• Retail / remote prop trading – firms (FTMO, Topstep, NEOM Funded, etc.) that sell a paid evaluation online. Pass the rules and you get a larger account – usually a simulated one (NEOM Funded is fully simulated end-to-end) – whose results the firm mirrors with its own risk budget.

This article focuses on the second model, which is what 99% of retail traders actually encounter when they search “prop trading.”

Prop trading used to live inside investment banks. For most of the 1980s–2000s, banks like Goldman Sachs, Morgan Stanley, Deutsche Bank, and Lehman Brothers ran large internal desks whose job was to bet the bank’s balance sheet on equities, fixed income, FX, and commodities. Proprietary desks were often the highest-earning groups in the bank.

That era ended – at least inside U.S. banks – with the Volcker Rule, a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Named after former Fed Chair Paul Volcker, the rule prohibits U.S. banking entities from engaging in most short-term proprietary trading and from sponsoring hedge funds and private-equity funds. It took effect in 2014 after an extended rule-making period and was modified (but not repealed) in 2019–2020.

Banks spun out or shut down their prop desks. Many of those traders joined or started independent firms. A parallel path opened around the same time: cheap retail trading platforms (MetaTrader, NinjaTrader), commoditised market data, and cloud infrastructure meant a small team could run a global prop-trading operation from a single office. FTMO, founded in Prague in 2015, popularised the paid evaluation model that every remote prop firm now uses in some variation.

The mechanics are simpler than the marketing makes them sound. A remote prop firm’s revenue and risk engine boils down to four linked components:

1. Evaluation fee. You pay a one-time fee (typically $45–$900 depending on account size) for access to an evaluation account.
2. Simulated trading environment. The evaluation, and in most cases the “funded” account that follows, runs on a simulated feed backed by a real liquidity provider or broker. Orders execute at real market prices, but no client capital is at risk.
3. Rule set. You must hit a profit target (commonly 8–10% on the first phase, 4–5% on the second) without breaking maximum daily and overall drawdown limits.
4. Profit split + payouts. If you pass, you move to a funded account. The firm pays you a share – usually 70% to 95% – of the profits you book. Payouts can be bi-weekly, monthly, or on-demand depending on the firm.

The firm’s profit-and-loss statement looks something like this: evaluation fees in, payouts + tech costs + rare “real” funded trader P&L out. Since most applicants don’t pass, the evaluation fees alone cover the business. Traders who do pass are a cost; the good ones are still highly profitable to keep because they’re a referral and branding asset even when the firm mirrors their trades with conservative sizing.

Every paid evaluation is a filter. The firm wants traders who are consistently disciplined with risk – not necessarily the most profitable. Three structures dominate:

1-step evaluation

A single challenge phase. Hit the target (often 8–10%) within rules, then get funded. Faster but typically comes with stricter drawdown rules or lower reward shares.

2-step evaluation

The original FTMO-style structure. Phase 1 target is usually 8–10%, Phase 2 is lower (4–5%). Both phases enforce the same drawdown rules. Pass both, get funded.

Instant funding

You skip the evaluation – pay a higher fee, and start on a funded account immediately. Rules tend to be tighter (smaller drawdown, smaller split) and are designed to catch reckless traders within the first few days.

Across all three, the most common disqualifiers are the daily loss limit (usually 4–5% of starting balance) and the maximum drawdown (usually 8–12%, sometimes measured as a trailing high-water mark rather than from the starting balance). Misreading how drawdown is calculated is the most common reason traders blow accounts on what they thought was a perfectly fine trade. Read the rules page line by line before you pay.

Prop trading itself is legal in essentially every major jurisdiction. The regulatory layer depends on what is being traded and whose money is at risk:

• Firm’s own capital, no public offering. This is the definition of proprietary trading and is explicitly permitted outside of U.S. bank holding companies (where the Volcker Rule applies).
• Simulated accounts. Because no client money is traded, most remote prop firms don’t need a broker-dealer or MiFID investment-firm licence. They’re software and education businesses – which is why their terms of service emphasise that they are not a brokerage.
• Futures-specific rules in the U.S. Firms dealing in U.S. futures often register or partner with an entity regulated by the CFTC and the NFA. This is where some of the highest-profile prop-firm enforcement actions have happened.

Is it a scam? A minority of firms are – there have been enforcement actions in both the U.S. and Europe against prop firms that falsified profit histories, used unregistered liquidity providers, or refused legitimate payouts. The industry also saw a major enforcement event in 2023 when the CFTC filed a civil enforcement action against My Forex Funds (Traders Global Group Inc.); the case underscored that prop firms claiming to be “just software” can still fall under CFTC jurisdiction when they market leveraged retail FX.

The vast majority of well-known firms are legitimate businesses, but “legitimate” is not the same as “easy to win at.” The business only works because most evaluations fail. That’s a fair trade when it’s disclosed, and a scam when it isn’t.

Prop trading makes sense for a narrow profile of traders:

• You already trade profitably in a demo or small live account. Prop firms amplify your existing edge – they don’t create one.
• You understand position sizing and can respect a hard daily loss limit. If you’ve blown a personal account, the probability you blow an evaluation is high.
• You don’t have enough capital to trade the size you want to trade. This is the core value proposition: $50K–$400K of simulated capital for a few hundred dollars in fees.
• You’re okay with the income volatility. Even funded traders don’t earn steady monthly income. Distribution is lumpy.

It is not for traders looking for a passive income stream, people using borrowed money to pay the evaluation fee, or anyone who hasn’t read the rules end-to-end. European regulators such as ESMA have documented for years that the majority of retail CFD accounts lose money – prop trading doesn’t repeal that statistic, it just relocates the loss from your wallet to the evaluation fee.

Pros

• Leverage without personal risk. Your worst-case outcome is the evaluation fee, not your savings.
• Scaling programmes. Most firms let consistently profitable traders grow from $50K to $200K+ simulated capital.
• Structured risk rules. For beginners, having a hard daily loss limit imposed from the outside is probably the fastest way to build the habit of respecting one.
• Global access. You can trade a funded account from nearly anywhere with a bank account and a trading platform.

Cons

• Low pass rates. Independent industry data is thin, but the firms themselves typically cite single-digit pass rates for first-attempt funded status.
• Rule traps. Consistency rules, news-trading restrictions, and trailing drawdown calculations can disqualify otherwise profitable traders.
• Platform risk. The firm can change rules, pause payouts, or disappear. Diversify if you trade prop seriously.
• No real client money. Some traders find it psychologically different – easier – to trade simulated accounts. That can bleed into bad habits when they move to real money later.

Use this checklist before you put a credit card down:

1. Find the legal entity. Legitimate firms name the company on their Terms. Search that name in the business registry of the country of incorporation and in enforcement databases (CFTC, FCA, ASIC).
2. Read the rules page cover to cover. Pay attention to how drawdown is calculated (static vs. trailing, intraday vs. end-of-day), what counts toward the daily loss limit, consistency rules, and news-trading restrictions.
3. Find published payouts. Most reputable firms publish a payout wall with dates and amounts. Lack of third-party-verifiable payouts is a red flag.
4. Check the independent-review pattern. You want gradual growth of reviews over time, not a burst of positive reviews all in the same week.
5. Talk to their support before paying. Response speed and quality tell you what your experience will be like after they have your money.
6. Understand the broker / liquidity provider. Funded accounts eventually flow to a real venue. The name, regulation, and execution quality matter.

For NEOM Funded specifically, the full rule set lives on the rules page, the liquidity and technology providers are disclosed under About, and verified Performance-Reward records (simulated evaluation programme) are shown on the homepage. Always double-check on the actual site – and on the archive – rather than taking a YouTube review at face value.

If you’re reading this article, you’re probably somewhere on the beginner-to-intermediate spectrum. A sensible sequence:

1. Weeks 1–2: Trade a demo account with your intended strategy at your intended position size. Keep a trade journal. If you’re not within a few percent of profitable after 40+ trades, stop and fix your strategy before paying anyone.
2. Weeks 3–4: Shortlist two or three prop firms. Download their platforms (MT5, NinjaTrader). Dry-run the evaluation rules on your demo – specifically the drawdown and daily loss rules.
3. Week 5: Buy the smallest evaluation that matches your strategy ($5K–$25K). Treat it as tuition. You’re buying feedback, not guaranteed capital.
4. Week 6+: If you pass, be more conservative on the funded account than you were on the evaluation. If you fail, review your trade journal before buying another evaluation. Most failures repeat.

Our complete guide to funded accounts breaks down each rule type with worked examples, and the risk management article covers position sizing for evaluation-phase trading.