What Is a Prop Firm? The Operator's Definition

"Prop firm" is short for proprietary trading firm, but the phrase now covers two very different businesses. Most people who search for it mean the evaluation model that grew in the 2010s and 2020s. A smaller group means the older model, where a firm trades its own money through employed or contracted traders.

We write this from the operator side. Our team operates prop firms ourselves, and PipValley builds websites for prop firms, so we describe the model the way founders have to understand it: as a product, a set of rules and a cash cycle.

How does the evaluation model work?

The evaluation model works in three stages. A trader buys a challenge at a chosen account size, trades a simulated account against a profit target and loss limits, and, if they pass, moves to a simulated funded account where they can request payouts under published conditions.

The trading is simulated; the payouts are real money, funded by the firm. FTMO, for example, states that "all accounts we provide to our clients are demo accounts with fictitious funds and any trading is in a simulated environment only." Firms describe payouts with words like rewards or performance fees, because no client money is being managed.

• Evaluation: one, two or three phases, or none for instant models.
• Rules: profit target, daily loss limit, maximum loss, minimum trading days and policies on news, weekends and EAs.
• Funded stage: still simulated, with a payout split, a cycle and often a consistency rule.
• Payout: paid from the firm's revenue, usually after identity checks.

How is that different from a traditional prop trading firm?

A traditional proprietary trading firm puts its own capital at risk in real markets and keeps the trading profit. Banks used to run large proprietary desks too, until the Volcker rule, created by section 619 of the Dodd-Frank Act, generally prohibited banking entities from proprietary trading, according to the Federal Reserve.

An evaluation firm sells a test. Its revenue comes from traders, not from markets, and its biggest cost is the payouts it awards. Our guide to proprietary trading firms covers the older model; the rest of this library covers the evaluation model.

What does it look like from the inside?

From the inside, a prop firm has five jobs: design a fair test, price it, collect payments, pay the traders who pass on time, and keep enough trust that the next trader buys. Technology for the first three is usually rented from a white-label or platform vendor. The last two are where firms succeed or fail.

The model is not a niche. Prop Firm Match tracked about $325 million in payouts to traders in 2025, according to Finance Magnates, and that covers only firms that connected their data. It is also fragile: Finance Magnates estimated that 80 to 100 prop firms shut down in 2024.

Questions

Sources

1. FTMO: homepage and simulated-account disclosure
2. Federal Reserve: Volcker rule
3. Finance Magnates: Prop Firm Match tracked about $325 million in payouts in 2025
4. Finance Magnates: 80–100 prop firms wiped out in 2024's industry collapse