How Prop Firms Make Money: The Business Model Explained
Understanding incentives matters. Here’s a simple view of how prop firms generate revenue and why rules are central to their risk management.
Where the money comes from
- Challenge fees: One-time or repeat fees to enter the evaluation.
- Trading costs: Spreads/commissions, especially when the firm is broker-linked.
- Scaling programs: Long-term programs can retain successful traders.
Why the rule set is strict
The firm’s primary job is risk control. Drawdown limits, daily loss limits, and news rules reduce tail risk. For traders, these constraints can be the main challenge.