What is prop trading?

Proprietary trading in general, the classic firm model, the retail evaluation model and the US rules.

Short for: Proprietary trading
Whose money: The firm's own
US banks: Limited by the Volcker rule

Rules checked on September 26, 2026 · By helloweekends Editors

What is prop trading? Prop trading, short for proprietary trading, is when a firm buys and sells financial instruments with its own money, for its own profit, rather than carrying out trades for customers. Banks and trading firms have long done it. Retail futures prop firms use the name differently: they sell paid evaluations on simulated accounts and share profits with traders who pass.

Proprietary trading in general

When a firm trades for its own account, the gains and the losses are the firm's. That is the difference from agency trading, where a broker places orders for customers who own the positions and carry the risk. A proprietary trade can be in stocks, bonds, currencies, futures or options. The Federal Reserve describes the kind of trading the Volcker rule targets as short-term proprietary trading of certain securities, derivatives, commodity futures and options on them, for the firm's own account.

The classic model: a firm trades its own capital

In the classic model, a trading firm or a bank's trading desk puts its own capital at risk. Traders trade the firm's money within limits the firm sets, and the firm keeps the result. Traders are paid by the firm under their own agreements with it.

Banks and the Volcker rule

In the United States, banks face a specific limit. Section 619 of the Dodd-Frank Act, known as the Volcker rule, added section 13 to the Bank Holding Company Act. According to the Federal Reserve, the rule generally prohibits banking entities from engaging in proprietary trading and from investing in or sponsoring hedge funds or private equity funds.

Who it covers: "banking entities", meaning insured depository institutions and companies affiliated with them.
Who wrote the rules: five agencies, the Federal Reserve Board, the CFTC, the FDIC, the OCC and the SEC, issued final rules on December 10, 2013.
Exemptions: the rules exempt certain activities, including market making, underwriting, hedging and trading in government obligations.

The retail evaluation model

Most firms that call themselves futures prop firms today sell a service to individual traders. You pay for an evaluation, trade a simulated account under published rules and, if you pass, receive a funded account with a profit split.

General comparison. Firm examples from official pages, checked September 26, 2026.
Question	Classic proprietary trading	Retail futures prop firm
Whose money is traded?	The firm's own capital	Usually a simulated balance; a few firms move some traders to live accounts
What does the trader pay?	Set by the trader's agreement with the firm	Evaluation fees, monthly or one-time, plus any reset, activation or data fees
How does the trader earn?	Compensation from the firm	A profit split on payouts, such as 90% at Topstep, Tradeify, Lucid Trading and Alpha Futures
What are the rules?	The firm's internal risk limits	Published rules: maximum loss, daily loss limit, consistency, flat-by times

Some retail firms do connect their program to live trading. Topstep moves traders from the Trading Combine to an Express Funded Account, and to a Live Funded Account only by Risk Team call-up. Take Profit Trader invites some traders from its simulated PRO account to PRO+, a live account run through Tradovate. At Earn2Trade, partner prop firms provide the funded accounts, either as LiveSim (simulated) or Live accounts. For how the retail model works step by step, see what is a prop firm.

US rules at a high level

Futures firms that handle other people's orders or money must generally register. The CFTC says the Commodity Exchange Act requires futures commission merchants and introducing brokers to register unless they qualify for an exemption. One example it gives: a firm handling transactions only for proprietary persons, such as the firm itself, its affiliates, top officers or directors, need not register as a futures commission merchant.

The CFTC has delegated registration to the National Futures Association (NFA), and CFTC-registered firms must, with few exceptions, be NFA members. The NFA's definitions:

Futures commission merchant: solicits or accepts orders for futures and related contracts and accepts money or other assets from customers to support them.
Introducing broker: solicits or accepts orders but does not accept customer money.
Commodity trading advisor: advises others, for compensation or profit, on trading futures, options on futures, retail forex or swaps.

Whether a retail prop firm must register depends on what it actually does, and a firm calling itself "regulated" is not a registration record. Check the NFA's BASIC database. Among the firms we track, Topstep's affiliate Topstep Brokerage LLC is listed as a CFTC-registered introducing broker and NFA member (NFA ID 0567079); the registration is held by the brokerage affiliate, not by Topstep LLC, which runs the program. Alpha Futures' terms say it is not registered with any US federal or state financial regulator.

Know the riskA retail prop firm evaluation is a paid service with simulated trading, not a job at a trading firm. Most people who buy one do not pass it, and firms change their rules and close. This page is general information, not legal or investment advice.

Questions

What is prop trading in simple terms?

A firm trading with its own money for its own profit, instead of placing trades for customers. The firm keeps the gains and takes the losses.

Can US banks do proprietary trading?

Generally not. The Volcker rule generally prohibits banking entities from proprietary trading, with exemptions for activities such as market making, underwriting and hedging.

Is a retail prop firm the same as proprietary trading?

Not quite. Most retail futures prop firms sell evaluations on simulated accounts and pay a share of simulated profits. Only some move traders to live accounts.

How can I check whether a prop firm is registered?

Search the firm and its affiliates in the NFA's BASIC database. At Topstep, for example, the registration belongs to its brokerage affiliate, Topstep Brokerage LLC.

Sources

All checked on September 26, 2026.