Types of prop firms and how they compare

The term «prop firm» (Prop Firm) may at first seem to refer to just one type of trading company, but in practice several different models go by this name. If you say it to a former Wall Street trader, they will probably picture a firm that hires professional traders to trade the market with the firm's own capital. By contrast, many of today's online traders hear «prop firm» and think of companies that charge an evaluation fee in exchange for access to a funded account.

Both interpretations are correct, and this is one of the main reasons for confusion about the types of prop firms. In this article, we first look at the precise definition of a prop firm, then compare its two main groups, institutional prop firms and retail funding firms, and explain the subcategories of each. We then look at how prop firms make money and the points you should consider before choosing a firm.

  What Is a Prop Firm?

Setting the jargon aside, the definition of a prop firm is simple: proprietary trading firms trade the financial markets with the firm's own capital. The firm therefore profits from the results of its trades and also bears the losses on the capital it puts to work in trading.

This feature, trading the firm's proprietary capital for the firm's own account, is the most important difference between a prop firm and many other financial businesses. The term «prop shop» (Prop Shop) is also used instead of Prop Firm in some sources, especially in institutional trading, and essentially refers to the same concept.

That said, some prop shops may ask the trader to put up part of their personal capital as risk capital. So if you are considering an in-house trading desk, you should check the terms regarding the trader's personal capital carefully.

 

The Two Main Types of Prop Firms

Almost every prop firm model can be placed in one of two main groups, but these two groups differ greatly in structure and in how they operate. An institutional prop firmhires traders like any ordinary employer. A candidate applies for a position, goes through interviews and, if hired, usually receives a fixed salary plus a performance bonus. The trader pays no evaluation fee to be hired, and the firm puts its own capital behind their trades.

By contrast, retail funding firms have brought the prop model online. In this model, instead of applying for a job, the trader usually pays a fee for an evaluation and trades on a demo account under a set of rules. If successful, they may receive a funded account and be entitled to a percentage of the trading profits. Depending on the firm, the funded account may be simulated or backed by real capital. So one path is essentially a hiring path, and the other is a paid evaluation program for gaining access to a funded account. Confusing these two models is one of the most common misconceptions about prop firms.

Institutional Prop Firms vs. Retail Funding

 

This difference matters a great deal for a trader who assumes a funded account works like a full-time job. A funded account is not an institutional position with a monthly salary; it is a different product that lets an independent trader trade within the firm's capital and rules.

Types of Institutional Prop Firms

Institutional prop firms represent the more traditional form of proprietary trading and are themselves divided into several models. Independent prop firms operate with their own capital and without direct ties to a bank. Jane Street and Jump Trading are well-known examples of this group.

Bank proprietary trading desks are internal units that trade with the bank's capital. However, the Volcker Rule, part of the Dodd-Frank Act, has significantly restricted banks' proprietary trading activities since 2014. Broker-dealer trading desks can also have various structures, including proprietary trading units, prop shops, hedge funds and high-frequency trading (HFT) operations.

Another type of this activity is market making. Market makers on venues such as CME, ICE and Nasdaq continuously quote buy and sell prices and, rather than simply betting on market direction, earn income from the difference between the buy and sell price, or the Spread .

 

Common strategies at these firms include market making, statistical arbitrage, merger arbitrage and algorithmic or high-frequency trading. These activities usually rely on quantitative approaches and engineering and math skills. In this model, the position a trader lands is a real job and usually comes with a salary and bonus.

Funding Prop Firms for Retail Traders

The model many online traders think of today when they hear «prop firm» is the retail funding firm. In this model, the trader pays a fee, trades on a demo account under a set of rules and, if they reach the profit target and stay within the set limits, may receive a funded account.

The profit split in this model is usually around 70 to 90 percent, although some firms advertise splits of up to 90 or 95 percent. The exact payout terms, restrictions and account structure should be checked in each firm's own rules. These firms also differ by the market or asset traded, including futures, forex, cryptocurrencies, stocks and options. Each market has different rules and trading hours. For example, a program built around futures trading is not structured the same way as one focused on forex spreads or the 24-hour crypto market.

Trade the Pool is an example of a stock-focused funding program, while The5ers offers a multi-asset model covering forex, CFDs and futures. These examples are only meant to illustrate the differences between models, and the terms of each program should be reviewed separately before signing up.

Key rules and criteria at retail prop firms

Retail prop firms usually set limits on daily loss and trailing drawdown . The source article cites a common range of about 4 to 5 percent for the daily loss limit and about 8 to 10 percent for the maximum trailing drawdown; however, these figures vary between firms and should not be treated as a fixed standard for all prop firms.

 

Before paying an evaluation fee, check the following:

·         Asset type: futures, forex, crypto, stocks or other markets.

·         Account path: Evaluation or Instant Funding.

·         Daily drawdown and trailing drawdown (Trailing Drawdown) rules.

·         Profit split percentage and timing of the first payout.

·         Whether the capital is simulated or real at the stage you are entering.

Passing the evaluation is not the end of the road. The funded account also has its own rules, and breaching a single rule can lead to the account being closed. So simply hitting the profit target in the evaluation stage does not guarantee you will receive payouts or keep the account.

Evaluation or instant funding: what is the difference between the two models?

In the retail model, there are usually two main ways in. The traditional path is the evaluation: the trader trades on a demo account, reaches the set profit target and stays within the drawdown limits, so that after passing they move on to the funded stage.

In the newer model, instant funding (Instant Funding) removes the evaluation stage and the trader goes straight into a funded account. This path usually comes with a higher fee or stricter requirements around profit withdrawals and consistency. Neither model can be considered better than the other without looking at the terms of the agreement. A cheaper evaluation may come with stricter Reset rules, while the higher fee for instant funding may be charged in exchange for faster access. You should therefore compare the Reset terms, payout cap, consistency rules and real cost of each path against each other.

Also, the nominal account size on its own is not a good basis for comparison. In practice, the gap between the account balance and the maximum allowed loss matters more than the large number advertised as the «account capital».

How do prop firms make money?

Understanding a prop firm's revenue model can help a trader better assess a firm's fee structure and rules. Prop firms can earn from the trading profits on the capital they deploy, as well as a share of traders' profits. Retail funding firms also have another revenue stream that does not exist in this form at institutional prop firms: the evaluation fee (Evaluation Fee) that the trader pays before getting access to a funded account.

The source article refers to research by Barber, Lee, Liu and Odean at the University of California, Berkeley, according to which more than 80 percent of day traders lose money over a typical six-month period. The article uses this data to explain the economics of the evaluation model; that is, the fees paid by traders who fail the evaluation can be a source of revenue for some firms in this space. As a result, you should not simply assume that every funding firm only makes money when its traders are profitable. The firm's revenue structure, evaluation fee and profit split terms should all be reviewed together.

Prop firm vs. hedge fund vs. broker

Prop firms, hedge funds and brokers all operate in the financial industry, but they do not share the same business model.

 

For this reason, a prop firm is structurally neither a broker nor a hedge fund. The differences in their business models are also reflected in the type of capital, the relationship with clients or traders, and regulatory requirements. The source article notes that banks' proprietary trading desks came under greater oversight after the 2008 financial crisis and that the Volcker Rule restricted banks' proprietary trading activity.

How to choose the right type of prop firm

Choosing a prop firm is best not started with price. First, decide which market you trade, what your goal is, and whether you are looking for a career path or a funded account to run your own strategy.

If your goal is to build a career in professional trading, you should focus more on institutional prop firms, in-house trading desks and quant firms. If you trade independently and are looking for more capital to run your strategy, retail funding programs can offer you a different model.

Once you have defined your goal and market, review the account terms: drawdown rules, profit split, evaluation fee, withdrawal conditions, Reset and whether the capital is simulated or real. These details matter more than the nominal account size.

 

Ultimately, no single type of prop firm suits every trader. The choice depends on the market traded, experience, career or trading goals and the account structure. For a beginner trader, trying a demo account or an evaluation with transparent fees and rules can also give a clearer picture of the conditions before paying larger fees.

Conclusion: know the type of prop firm before you choose

In practice, the term «prop firm» covers two different worlds. One model is the institutional prop firm, which hires traders and, as part of an employment relationship, pays a salary and usually a performance bonus. The other model is the retail funding firm, where the trader pays a fee to join its program, goes through an evaluation and, if successful, can get access to a funded account and a profit split.

So simply seeing the label «prop firm» does not give you enough information about a firm's model. First define your target market and your goal, then review the business model and the account path. And before paying anything, read the drawdown rules, payout terms, restrictions, Reset fees and whether the capital is real or simulated.

A larger advertised account size does not necessarily mean more usable capital; what matters in practice for a trader is the account rules and how far it is from the maximum allowed loss. Understanding these differences will help you compare prop firms based on their actual structure.

Source: This article is based on the English text by Trade the Pool titled «Types of Prop Firms Explained: Institutional, Retail Funded, and Every Model in Between», published on 12 August 2026, translated and rewritten for Persian-speaking readers. 

 

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