What is prop trading?
Written by an ex-institutional trader. Prop trading explained: what proprietary trading actually means, the gulf between traditional prop desks and retail challenge firms, how each makes money, and the honest risks for Australians.
Direct answer
Prop trading, short for proprietary trading, is when a firm trades financial markets with its own capital to make a profit, rather than trading on behalf of clients. The profit (or loss) belongs to the firm. The phrase covers two very different worlds: elite institutional desks that hire salaried traders to manage firm money, and retail "challenge" firms that charge a fee for an evaluation and then split profits with traders who pass.
When most retail traders say "prop trading" in 2026, they mean the second model: firms like FTMO and FundedNext that sell a paid evaluation. These are global and not regulated by ASIC, most participants fail the evaluation, and payouts are a profit split rather than a salary. Understanding which model you are looking at is the single most useful thing to get straight first.
What prop trading means
Prop trading, short for proprietary trading, is when a firm trades financial markets with its own capital to make a profit, rather than trading on behalf of clients. The defining feature is whose money is at risk: in prop trading the firm risks its own balance sheet, and the profit or loss belongs to the firm. There are no client mandates and no management fees on outside money.
That single idea covers two businesses that could hardly be more different in practice. Getting clear on which one you are looking at is the most useful first step, because the word "prop" is used for both.
Disclosure: SatoshiMacro may earn a commission if you start a challenge with a prop firm through links on this page, at no extra cost to you. See our full affiliate disclosure.
The two models
The table below is the fastest way to see the gap between the two things people call prop trading.
| Feature | Traditional prop desk | Retail challenge firm |
|---|---|---|
| Examples | Jane Street, Optiver, IMC, Citadel Securities | FTMO, FundedNext, The 5%ers |
| How you get in | Competitive recruitment, quant skills | Pay a fee, pass an evaluation |
| Who pays whom | The firm pays you a salary | You pay the firm to attempt the challenge |
| Capital traded | Firm capital, often very large | A funded or simulated account, US$10k to US$200k+ |
| How you earn | Salary plus bonus | Profit split, typically 70 to 90 percent |
| Who it is for | Full-time professional traders | Retail traders worldwide |
Almost every "prop trading" listicle aimed at retail traders is talking about the right-hand column. Both are legitimate. They are not substitutes for one another, and they reward completely different things.
How prop trading makes money
The two models earn very differently:
- Traditional desks profit from the trading P&L their salaried traders generate, using the firm's deep capital, sophisticated technology and market-making edges. The firm wins when its traders, in aggregate, beat their costs.
- Retail challenge firms earn primarily from failed evaluation fees. A challenge fee multiplied by a high failure rate is the engine of the business, supplemented by spread or commission markups and the firm-side share of profits on the minority of funded accounts that stay profitable.
This is a business description, not a moral judgement, but it explains the incentives. A retail firm's revenue is largest when challenge volume is high, which is why the firms with the strongest reputations invest heavily in being seen as fair: their evaluation business depends on traders trusting that the rules will be applied consistently.
The retail challenge model
For an Australian retail trader, "getting into prop trading" almost always means the challenge route. The path is: pay a fee, trade a demo account to a profit target without breaking the drawdown rules, optionally clear a second verification phase, then receive a funded trading account on which you split profits with the firm.
The appeal is access to size: a profitable trader can trade a US$100,000 account without depositing US$100,000. The catch is the odds. Combined pass rates cluster around 5 to 15 percent, and the evaluation fee is a sunk cost the moment you breach a rule. The how to pass a prop firm challenge guide covers the mechanics; the honest summary is that a challenge scales an existing edge rather than creating one.
The honest risks
Retail prop trading carries risks that the marketing tends to underplay:
- Most participants fail. The base case for buying a challenge is losing the fee, not earning a payout. Only attempt one with money you can treat as a calculated bet.
- No ASIC protection. Prop firms operate globally and are not regulated by ASIC in Australia. There is no consumer protection backstop, so payout reliability and rules transparency are everything.
- Trap clauses. Consistency rules, minimum trading days and news-trading bans end more accounts than people expect. Read every rule before paying.
- Tax. Any profit split you withdraw is assessable income for Australian tax purposes, not a capital gain and not tax-free.
Used by an already-profitable trader as a way to access size, the retail model can be reasonable. As a way to learn to trade on someone else's money, it is usually an expensive lesson. If you are deciding between firms, start with the live-tested best prop firms ranking.
Popular prop trading firms
Prop firm challenges carry a fee and most participants do not pass. General information, not financial advice.
This is general information, not financial advice. Last reviewed: 2026-06-02.
Frequently asked questions
What is prop trading in simple terms?
Prop trading is short for proprietary trading. It means a firm trades the markets with its own money to make a profit, instead of trading for clients or charging clients fees. Any profit or loss belongs to the firm. In the retail world, prop trading usually refers to challenge firms that let you trade their capital after you pass a paid evaluation, then split the profits with you.
How does prop trading work?
At a traditional prop firm, the company hires skilled traders, gives them firm capital and risk limits, and the traders aim to generate profit that the firm keeps a large share of. At a retail challenge firm, you pay a fee to take an evaluation, prove you can hit a profit target without breaking loss limits, and then receive a funded account on which you split profits with the firm. The two work very differently even though they share the name.
Is prop trading the same as a prop firm challenge?
Not exactly. Prop trading is the broad activity of a firm trading its own capital. A prop firm challenge is the specific paid evaluation that retail firms use to decide who they will fund. The challenge is how you get into the retail version of prop trading; it is the entry gate, not the activity itself. Traditional institutional prop desks do not use paid challenges; they hire through competitive recruitment.
Can you make a living from prop trading?
At a top institutional desk, yes, salaried traders can earn substantial incomes, but those seats are extremely competitive and require strong quantitative skills. In the retail challenge model, a minority of consistently profitable traders do earn meaningful profit splits, but most participants lose their evaluation fees without ever reaching a payout. Treating retail prop trading as a reliable living is unrealistic unless you already have a proven, repeatable edge.
Is prop trading legal in Australia?
Yes. Both institutional prop trading and the retail challenge model are legal for Australians. Retail prop firms do not hold an ASIC licence because they sell a paid evaluation rather than managing client money or offering a regulated financial product, so they sit outside the AFSL regime. That also means none of the ASIC consumer protections apply, so the burden is on you to choose firms with a strong payout track record.
What is the difference between prop trading and a hedge fund?
A hedge fund manages outside investors' money and charges them fees, with profits flowing largely to those investors. A prop trading firm trades only its own capital and keeps the profits itself, with no outside client money involved. The risk and the reward both sit with the firm in prop trading, whereas a hedge fund is investing other people's money under a mandate.
