It was roughly ten years ago when I saw this “pay to prop trade” business model for the first time.
Since then, many, many copycats have popped up and it's easy to see why: this is not the most challenging business to get going, and the money is about as good as it gets for the retail business. So good, that if I was the type, I would much rather run of these these than a brokerage. Competition is easier to get around, payments are guaranteed, and flows are far more predictable. If you already have a big following, all the easier. It all really depends on how it is executed, which you will read about below.
I still take a lot of calls with traders, retail and otherwise, and it seems I can't go a couple of weeks without being asked about these platforms. I can't say I am ever comfortable on this topic, either, as I know most of them are in the business of marketing hope. Here's the gist, as many of you already know:
1. Trader pays a fee to XYZ
2. XYZ gives them a demo account with rules regarding profit targets and drawdowns
3. If the trader achieves the profit target without breaking any of the rules, they will be “accepted” (but not always “funded”…more on this in a bit) where they “get to keep” up to 90% of their profits (but not always…also, more on this in a bit).
I have read other reviews on these platforms prior to starting but frankly they are all either extremely negative or overwhelmingly positive because they are pushing affiliate links. So my primary goal here is to be as objective as possible and inform, while observing perspectives and offering alternatives.
And to be clear, all links in this article are “no follow” and do not contain affiliate tracking of any kind.
These businesses are tempting to many people for obvious reasons. You get to use other people's money and have a chance at simply eating what you kill, so to speak.
Throughout this, I tried to put myself in the shoes of these business owners as much as possible. To reiterate, you need to look at it from all perspectives in order to be objective.
What's written below is not meant to be an attack on any of them. In fact, I am deliberately using “some” and “they” to avoid direct conflicts – I have zero interest in getting into petty fights online. The goal here is to highlight the fine print over large font marketing so people can make an informed decision.
Though I will admit, red flag #1 and my main motivation for writing this today was when I found out who was behind the scenes at a couple of these. Bottom line, these are not the most trustworthy characters (in a couple cases) and so the antennae went up. When I visited their websites, there were some obvious, outright lies stated both on the website and in videos by founders, etc.
So the question becomes: why lie? If the product is as it is, what's the point of doing that? I think it is simply to try to make themselves stand out from their competition, because at the end of the day this model is a very simple one.
I like to think of it is a clear path with a bunch of crap thrown on the ground essentially acting as obstacles for aspiring traders.
Red flag #2 is the borderline obscene amount of marketing involved. During the process of writing this, I tested out a couple services (mentioned below) and I received a marketing email daily, flooded with promos and specials. 50% off. A “$50,000” account for the cost of the “$25,000” one. You will see why these account values are in quotes below.
Are they impossible? No. Many people pass these tests. There has to be some kind of rate of success or they would never survive. But the halflife on those who pass the test is usually quite small, hence the reason many “funded” traders are not even literally “funded” these days.
So here we go:
A Brief History of the Model
This business model is an old one, redone in 2010 by (I believe) TopStep Trader. They are the ones who seemed to have really put the wheels in motion and marketed this to the nth degree, spawning it into what we see today. Prior to TopStep, there were a range of prop shops in major cities where you would show up and toss down a good pile of cash for similar opportunity (albeit more than many of these current platforms). In the past, the fee was said to cover everything from education, platform and data fees, office overhead, all the way up to initial margin on the accounts themselves. Models like this still exist, but in smaller numbers. Fees usually ranged anywhere from $2,000 to $20,000. But with online retail trading becoming what it currently is, this was just the next evolution. So here we are.
The Gist of the Model. Touted Rules vs. “Knowledgebase” Rules
Most operate off of a subscription fee. Depending on the touted account size selected by the user, the fee increases along with it. Upon signing up, credentials are received to a demo account where the trader essentially has to prove themselves.
These fees can get extremely high for what they are.
The trader is imposed a set of rules, which they are not allowed to break. There are typically two sets of rules: those stated on the homepage / pricing table, and those found in the FAQ's and knowledgebase.
Of course, those in the FAQ's and knowledgebase can be very nitty gritty. For example on some platforms, accidents on exposure are allowed by the system but will invalidate the account if broken (so why not just disallow them in Rithmic or whatever platform is used…this 100% can be done). If it was a real account, the trade would simply not be allowed to be opened.
Bottom line, it can get very complicated and ethical boundaries are very oftentimes crossed. Depending on the company, “Knowledgebase rules” can get very specific and one tiny slip up causes the account to get blown, forcing the user out and requiring he/she pay a (usually) $100 reset fee to start all over again.
So bottom line, there are a string of “Gotcha!TM” scenarios which would invalidate accounts.
Over time, other companies have learned that people get very frustrated with these seemingly “Gotcha!TM” scenarios, and tout very simple rules. So naturally, one would assume their pass rate is higher without them.
However, withdrawals on initial gains are stretched out. After a user passes the test, they (in some cases) don't even trade live after “funding”. They are given yet another demo account. Once they hit their initial $10,000 profit (or whatever), withdrawals on that money is stretched out over a long period (up to 4 months).
So in other words, they leverage time vs. “Gotcha!TM” scenarios, banking on the trader giving back his gains while they wait to withdraw their money.
Here's a quick, objective look at the main rules, using a “$100,000” futures account as a sample.
Bear in mind, these numbers mean nothing vs. your ability to get paid. I stress reading about: 1. how the onboarding process works and most importantly 2. if your withdrawals are stretched out over a long period of time. This is never advertised and always in fine print.
- Cost: $205-$325/month
- Max 10-14 contracts
- $6,000 profit target
- $3,000 – $3,500 trailing drawdown
- $2,500 daily loss limit
- First $8,000 100%
- $100 balance reset
- and on some, a $2,000 daily loss limit and/or $2,000 weekly loss limit
Knowledgebase Rules – If You Read Anything In This Article, Please Read This
Open an account and trade it. Simple, right?
Pretty much all of these websites are two different sites: the main site, where all the marketing is and where you sign up, and the support or knowledgebase site (usually on a subdomain), where the fine print is.
On few sites, there are very few additional rules in the knowledgebase. But on others, there are many. And these these rules usually have an enormous impact. Some of them were so bad that most traders would need the equivalent of the “holy grail” to pass and maintain the account, making it very clear that some of these business have zero interest in actually funding traders.
Again, I stress, not all. I did come across a couple companies who genuinely seem to be working in the best interests of the customers while protecting risk. But here are a few examples of rules and other items which frankly, I would be avoiding like the plague if I was looking to join one of these services:
- Unrealized Trailing Drawdown – when your open trade P&L peaks, regardless of whether the position is closed, it counts. Personally, I would only employ something like this if I had no interest in actually funding accounts and was looking to squeeze out the trader.
- Rules Changing Dramatically After “Funding” – I found several companies that advertised fixed drawdown (vs. trailing) as a selling point. But then I quickly discovered that once “funded” or entering another “phase”, the trader trades on another “live” sim account (it's just a demo account, kids), with trailing on unrealized drawdown (the worst case scenario). So in other words, they simply hook people in by stating one thing, then commit the worst offense by adding another layer to their process.
- Promotion of Trading Multiple Accounts – If I find an excellent trader, the last thing I am going to try to do is get him to pay me $1,000/month in subscription money for multiple accounts. And yet I found several companies promoting (and even providing copy tools) for traders to sign up for “as many accounts as they wish”. Again, this is a conflict between what these companies claim to be seeking, with actions clearly stating otherwise.
- Stretched Out Withdrawal Periods – Again, something that has no benefit to the trader and probably the worst next to unrealized trailing drawdown. Here is how it works: once you are “funded” and earn your first $XX,000.00, they break up the payments and release it once a month or x number of trades, over a long period (up to 4 months). The assumption is that the trader will give back what they earned during this timeframe and it will never have to be paid out. This is becoming more and more popular among these platforms for obvious reasons. I only assume most people signing up have no idea this even exists because these companies only state it deeply in their knowledgebase. I see why this is appealing to people running the business; payouts are very predictable as a percentage.
- Same contract size cap on micros: Micros have roughly 1/10 the required margin of their standard contract big brothers. These programs impose a cap of usually 3, 6, 12 and 15 contracts depending on the lot size. Some do not change this, even for micros, forcing the trader to overleverage themselves back on standard lot sizes and blowing the account.
- Companies claiming they have funded X millions, etc. With leverage, this is simply not true in most cases. They are overstating / lying about the value of their accounts.
- Scaling plans allowed by the system, but invalidate accounts – A “scaling plan” refers to allowed increased lot sizes according to account balance or some other metric. Many people are completely unaware these scaling plans even exist, and yet they are allowed by the system. Once a trader goes 1 lot too high, the account is closed and the trader is forced to reset the balance for another fee.
- Trading during certain times of day, allowed by the system yet disallowed by rules – Again, something which can simply be disallowed by the system but is not, and “get” the trader to blow the account.
- Extremely high commissions – Inflated commissions during evaluation in order to hinder performance. I came across several companies who were charging up to $5 per contract on micros (each tick = $1.25). All in, it should be around $0.60 up to $0.75 or so, retail. This is not even close to the real world and provides no value at all. It simply works against the trader. In a real prop firm, these commissions would be bottom of the barrel in order to maximize P&L.
So put it all together and bottom line: many of these platforms impose conditions which have absolutely no basis in the real world. In a standard live trading account, these would not be present. Some are blatantly imposed to to work against the best interests of the trader and actively seek to blow accounts, others less so.
So after all my research here, I decided to test one of these out and went with a company I thought was “good”. Well, even I fell into a “Gotcha!TM” trap on day one. For me, it was max position size. I signed up for a “$50,000” account, and neglected to change a setting on one of my widows (it was set to 5 contracts). I was already up about +$400 for the day trading one contract (total target was $2,000). Well, you know the rest. Trade executed, was allowed by the system, but broke a max position size rule by 1 (max was 4).
And that was it. Less than 2 hours. I contacted support via live chat, because it honestly felt like a cheap shot. So I asked them a simple question: why allow it by the system? I can very easily implement max position sizes on my backend….why don't you?
But do I really need to ask…
She went on to explain that she could do it, but people have to request it, first. So that answers the question of whether or not they have the ability to limit it on the backend. And the only plausible reason I can think of as to why they wouldn't apply it by default is that they need to fail accounts in order to remain profitable.
So you have somebody like me, with 20 years of experience under my belt, making a mistake going between two accounts and whoops. The rep was quick to explain that if I coughed up more money for an account reset I could have another “chance”.
In the chat, the rep kept letting me know I broke their rules (she mentioned it three times…and of course posted links to the knowledgebase rules). I was literally laughing. The effort put in to get me to guilt trip was something else.
And this is why I think a lot of these companies get a pass from the review standpoint. They make traders think everything is their fault but indeed they place incredulous obstacles all over the place. But something like this should not even be a rule in the first place. If I was running the show and had capital at risk, there is absolutely no way I would leave something like this up to chance. It would be blocked on the backend.
So you could argue I'm an idiot for doing something so blatantly “dumb”, but it is hard not to ask the question: “If not this, then what?”. Honestly, I am glad I realized this in less than a two hour window. Had this process been stretched out, and I dedicated a month of my spare time to this, I would have likely been pretty angry.
Granted, I would be lying if I said I took the evaluation very seriously anyway. I mostly signed up to click buttons and see what the fuss was about.
And there are many other scenarios the trader is put in under these types of platforms. Yes, you can say it was my fault from a black and white standpoint, but keep reading those knowledgebase articles and you'll find many more examples where quick misfooting wipes you out in the blink of an eye. Seems like it is just a matter of time with the vast majority of people.
This is not how professional prop firms work by any means. Not even close. So if you want to go by what defines a true “prop firm”, simply look at how they operate.
Ok, sounds evil, eh? But think about it: if I am in their position, and the people signing up are perfect strangers with no resumes, vouching, etc., do I really want to just start forking over money knowing nothing about them, and under these conditions? Of course not, and I don't think anyone reading this would want to do it either.
Even traders moving forward successfully over many months are capable of a major loss of funds, so there is never any way to ensure it wouldn't happen.
Frankly, I don't claim these people behind the scenes are all evil. But I do claim the model is very clearly tilted towards them making lots of subscription money over the profiting of the vast majority of their clientele. This much is dead obvious to even a casual observer.
So is there a better way of doing it?
Well yes, there is always a better way. But the better way is not as advantageous to the platform owners and in some cases would even make them unprofitable.
So maybe the model, in general, is just a terrible one for the customer…
I did make an attempt to contact two of the platform owners and get an idea in terms of profitability, how many traders pass, etc. One ghosted me and the other basically refused to provide any info that wasn't on their website. I only assume he thought I was going to throw him under the bus even though this was not the case. It was obvious by his tone that he did not trust me at all, so that's the way it goes, I suppose.
But here's something else to consider:
I have worked with traders of all sizes over the years, from just-getting-started retail to the largest, a multi-hundred million dollar portfolio manager. The former is almost always misinformed in some way, and (typically) believes they are better at trading than they actually are. Hope trumps reality. I have read countless stories over time about people depositing large chunks of their life savings into futures, forex and crypto accounts, only to blow it all in a short period of time.
So what's better?
That person depositing $75,000 into a futures account and taking it down to $5,000, or that person paying one of these companies $120 to learn that they don't actually yet know what they're doing?
And this is the biggest benefit, as I see it, to these platforms. They place people under an umbrella of accountability and force them to exercise prudent execution/risk management. The fee they lose to these companies doesn't even come close to what they would have lost in a live account. They will learn very quickly whether or not what they are doing is sustainable in any way.
The Account Sizes
Quite frankly, I have never understood the touted account sizes on the pricing tables. Here is why:
These models have their roots in futures markets. Futures have initial and maintenance margin. Unlike FX et al, they can fluctuate. The initial margin on futures contracts is quite low, negating the need for large accounts to manage a good amount of leverage. Most, if not all of these platforms, impose a rule where the trader needs to be flat at the end of every session. So essentially this means that they're only paying (day trading) margin, if anything at all.
So for example, the initial margin on a standard ES contract on a specific exchange is $400. Exchange margin (should you hold it overnight, but which is mostly forbidden by these platforms) is $11,500. So bottom line, to open 15 contracts, all you need is $6,000. Even if it were $1,000 per contract, that's only $15,000. For most of these platforms, 15 contracts is the equivalent of a $150,000 account. If you hit drawdown on it, positions are force closed anyway. So ultimately, these account sizes are clearly marketing over reality, because that kind of capital, along with the rules stated on these websites, is simply not necessary to manage that kind of leverage.
So bottom line, despite the stated account size, only a very small fraction of it is necessary to deposit in order to manage that number of contracts.
This is all especially true for the FX platforms. Especially those based outside the United States, they have access to massive leverage. Again, just do the math. I honestly don't understand why this is even a “thing” when we're talking about basic arithmetic here.
Life After “Funding”
Elephant in the room: why is “funding” in quotes? Because some of these platforms have learned not to fund accounts due to the rates of failure after acceptance being asymmetrically tilted against the trader.
In the case of several companies I was told are “better”, their “funded” traders don't trade live accounts. Some refer to this as another “phase”. This is actually a very normal practice for this type of model. In other words, any profits actually sent to the trader is simply coming from other people's subscription money, not the market.
I found this to be especially true in case of companies employing a slowed withdrawal process. Basically, they hold onto your money for up to four months with the expectation that the trader is going to give back what they earned.
This IS NOT the case with all of them. In fact, I found only one company which is upfront and honest about this and gives the trader the option of which route they want to take. Account conditions are modified for both and rules change / are extremely harsh vs. the evaluation period.
Some companies stagger (the most I saw were 7 stages of progression). In a nutshell, here is how it works:
- Evaluation phase – demo account, follow the rules
- “Funded” phase – demo account – for people who have passed the evaluation. Many people blow these accounts which is why these places *still* don't put live money on the line. In the case of some companies, this phase is broken up into several, and keeps going, and going, and going…
- Live phase – real account, only given to traders with extended track records. After several months or trading days, the account actually, finally, goes live.
Now as a trader, who cares? As far as I see it, I just want to get my P&L, whether it's based on Monopoly money, or not.
But the sheer fact this is done tells you everything you need to know about the business model. Again though, I get it. Customers are total strangers and forking over piles of cash to them is generally an awful business strategy.
There are very few complaints online (with any of these companies) about funded traders not getting paid. They all seem to pay the bill when it is due, which is comforting to hear. But again, my emphasis was more of an objective observation on the model, nothing more.
What Would I Do?
If the actual goal of these companies was to produce profitable traders then the vetting process would look very different.
Some random ideas as to what I would do:
- Lower the entry threshold. It costs a fraction of what these places charge.
- Create long-term, sustainable risk metrics which emphasizes quality over quantity. Most times people fail is because they are attempting to hit a goal on a deadline, forcing bad trades.
- Lengthen the time to complete and remove the “you have to trade every day” criteria (if it exists). Yes, we want to keep money productive but these are leveraged accounts. Different rules most certainly apply.
- Upon completion, vet the trader and the strategy. Resume and video interviews. It's a job, part-time or otherwise.
- Stress test the strategy based on executed positions.
- Forbid anything I don't want on the backend. This eliminates a large majority of $100 account reset nonsense. This is intentional and obviously a big source of revenue for these places.
- Set people up for long-term positive effects. Hold regular meetings with people who have a clue about what they are doing while being open to other methodologies.
- Fix a strategy for capable individuals. This is what professional firms do. The strategy is dictated and traded according to plan.
- Emphasize execution, above all. Bad traders react to active signals. Good traders seek foundational signals that offer asymmetrically favorable execution on pullbacks, etc. Trading is an execution game, less one based on strategy. Always has been.
…and I'm sure there is more. The best traders out there rarely have their potential seen. Those who have landed on my own desk have usually done so as a result of who they knew, not what they could do. I can only imagine who is out there in the world….
Again, my goal here is to just be objective. I want to think that many of these places are looking out for the long-term interests of their clients, but the reality is different as always.
If I am looking for traders, I'm looking for traders. The last thing I am going to do is play games with them by doing the equivalent of putting up a wire fence in front of them…
Sustainable? Extremely low odds. Best you can probably hope for is a hot streak, get as much money as you can, then leave the casino before the house odds kick in. Your biggest obstacle once funded are the dramatically modified rules for live accounts.
And I do imagine, if you are with a place long enough it would be like anything else: they would get to know you, and might work with you outside of the standard website criteria. But who knows. This is of course a very subjective topic.
So there you have it. I really do wish I was a little more cheerful on this one but even the “good” ones I found were still playing games. If I had to classify these places, I would as such:
- The standard churn and burns: those seeking to knock out traders with non-real world trading conditions. This group constitutes the majority of companies out there (and to a very high %).
- The real deals with poor checks and balances: these are the ones assuming the highest degree of business risk. They fund traders after shorter periods and are essentially better versions of #1. There are very few of these.
- Those attempting to mirror a true prop firm: they pay less as a % (but more overall), dictate some of the strategy, and provide routine support. I only saw two of these.
I tell everyone: If you can truly trade, money will always be there. Finding good traders is exceedingly difficult to do and sadly, a lot of huge potential is blown out the door by the poorer of these platforms.
*Please do not ask me for referrals.*
I have outlined both the good and the bad here and it is your responsibility to do your own due diligence. They stick out like sore thumbs once you know what to look for. With no commentary, here is a list of companies I delved into while writing this article. THESE ARE NOT IN ANY PARTICULAR ORDER.