What Are Prop Firms? How Funded Accounts Work, the Rules That End Them, and the Regulators

Michael Whitman · Trading since 2017, full-time since 2020 · YouTube creator, 137K subscribers · Published 2026-09-06 · Updated 2026-11-02 · Reviewed 2026-11-01

A prop firm, in the version sold to retail traders, charges a fee for an evaluation and then pays a share of the profit you make trading its account under strict loss rules. Nothing is lent to you. You never hold the balance, and the firm can end the arrangement the moment a rule is broken.

The older meaning still exists: a proprietary trading firm is any company that trades its own money for its own profit, from a few desks in a city office to the largest electronic market makers. Most people searching the term today mean the online funded-account model, so that is what this page takes apart, with the published rules of two firms read today, the regulators’ record, and a test of one rule on real prices.

How it works

Step one is the evaluation. You pay to trade a practice account against a profit target without breaking the loss limits. Many firms call it a challenge or a combine; the challenge page simulates it in detail.

Step two is the funded account. Pass, and you trade a larger account under the same or tighter rules. Many retail programs keep this stage in a simulated environment, with the firm deciding whether and how to copy trades into a real market. The firm’s own documents are the only place that question is answered.

Step three is the payout. You request a share of the profit, often a large percentage. The split looks generous because the firm’s exposure is capped by its loss rules and its revenue includes the fees paid by everyone who never reached a payout.

What changes hands is a contract, not capital. A lender would want collateral and interest. A firm paying a profit share on an account it controls needs neither.

The rules, read from two firms on 1 Nov 2026

Three numbers define almost every offer. A profit target, a daily loss limit, and a maximum loss over the account’s life. Platform and branding are packaging around them.

FTMO publishes them as percentages. Its Trading Objectives page, read today, lists a maximum loss of 10% on every account type and a maximum daily loss of 5% on the 2-Step and 3% on the 1-Step and Instant accounts.

The floor type differs by account. The 2-Step loss floor is static; the 1-Step trails at end of day; the Instant trails intraday on closed trades. The daily limit resets at midnight Central European time and is checked against equity, open trades included.

Topstep publishes them in dollars. Its help page on the Maximum Loss Limit, dated 18 Sep 2026, lists $2,000 on a 50K account, $3,000 on 100K and $4,500 on 150K. It rises with the end-of-day balance, never falls, and locks once it reaches the starting balance.

Naming them is not an endorsement. These two were chosen because both publish exact rule text; the terms of every firm change, and the rule page on the day you buy is the one that binds you.

Trailing versus static: a worked example on real prices

A static floor stays where it starts. On a $50,000 account with $2,000 of room, the account ends if it closes below $48,000, however well it did in between.

A trailing floor follows the best balance up. In the generic end-of-day version tested here, every new closing high moves the floor to $2,000 below it, until the floor reaches $50,000 and stops.

The rules below are generic test rules, not any named firm’s actual terms. Real programs differ in size, floor, timing and market.

Here is one real stretch. Start on 7 May 2026 with 61 shares of SPY bought at the $731.58 close, about $44,600 of stock in a $50,000 account. By the 2 Jun close the account stood at $51,707.39, so the trailing floor had climbed to $49,707.39.

Then SPY gave some of it back. On 10 Jun the account closed at $49,624.85, which is $82.54 below that floor. Under the trailing rule the account was finished, 23 sessions in, while still within $375.15 of where it started.

Under the static floor the same trades lived on. The lowest close in the 60-session window was that same $49,624.85, far above $48,000, and by 4 Aug the account was at $52,424.75. Same stock, same days, same size: only the floor rule differed.

The original data

The test ran the same comparison from every starting day available, not just the one above. Each start from 2 Jan 2024 to 6 Aug 2026 (651 of them) bought a fixed number of SPY shares worth up to $45,000 at the close and held for 60 sessions, using Yahoo’s daily closes (price only, dividends left out). One account had a fixed $48,000 floor; the other had a $2,000 floor that trailed the closing balance and locked at $50,000. Both are generic rules built for the test, not any firm’s actual terms.

The trailing rule ended 341 of the 651 accounts (52.38%) within 60 sessions. The static rule ended 195 (29.95%). Every account the static rule ended was also ended by the trailing one, and 146 were ended only by the trailing rule. The median trailing failure came after 24 sessions.

Read it as a description of the rule, not of a strategy. Holding SPY is not how anyone trades a funded account, and the real rule is monitored during the day, so checking closes only understates how often it would trigger. What the test isolates is the rule itself: given identical prices and size, a floor that follows profit upward ends far more accounts.

What regulators have done

The biggest case went against the regulator. In a case it announced in September 2023, the CFTC sued Traders Global Group, which ran My Forex Funds, alleging that more than 135,000 customers had paid at least $310 million in fees since November 2021.

The complaint also alleged that the firm, not an outside liquidity provider, was the counterparty to substantially all customer trades. A court froze the firm’s assets.

On 14 May 2025 the case was dismissed with prejudice. Judge Edward Kiel of the District of New Jersey also sanctioned the CFTC, finding it had acted willfully and in bad faith, and ordered it to pay the defendant’s legal fees.

What remains is an open question, not a settled rule. The case ended on the agency’s conduct, not on a finding about whether evaluation programs fall under commodity law. Treat a firm’s own jurisdiction and terms as the facts that apply to you.

Your claim is a contract, not a custodial account. A payout depends on the firm’s willingness and ability to pay. The investor protections that apply when a registered broker holds your money do not attach to a profit-share agreement, which is counterparty risk in its plainest form.

FINRA replaced the PDT rule, and that changes the stock pitch

For years, stock prop firms were partly a workaround. The pattern day trader rule required $25,000 in a margin account to day trade freely, and a funded account let smaller traders avoid it.

FINRA has now replaced that rule. Regulatory Notice 26-10, published 20 Apr 2026 after SEC approval on 14 Apr 2026, removed the day-trade-count designation and the $25,000 minimum in favor of intraday margin standards, effective 4 Jun 2026, with a phase-in for member firms running to 20 Oct 2027.

Ask your broker which standard it applies today. The pattern day trader page covers the change.

Futures were never under it. Most retail prop programs trade futures or forex, which had no PDT rule, so for them the change alters the comparison rather than the product. The futures prop firm page covers that version.

When it fails

The characteristic failure is behavioral, and the rules provoke it. A fee already paid and a target not yet reached push traders toward larger size, and size is the variable the challenge simulation shows to be decisive.

The second is reading the split and skipping the floor. A large profit share on a rule set you will breach is worth less than a smaller one on a rule set you will not, and the SPY test shows how much the floor’s type alone matters.

The third is treating funding as the finish line. The same limits, sometimes tighter, keep running, and the position sizing problem is unchanged.

The fourth is stacking accounts. Several evaluations at once multiply the fees and the attention while leaving the odds on each exactly where they were.

Faster styles fight their own costs too. On SPY in 2026, the median move over a 65-minute window was only 3.74 times the five-minute median, as the scalping page shows, so each round trip pays its spread against a small expected move.

Questions people ask

Are prop firms legit?

Some have paid traders for years and some have collapsed with payouts outstanding. The CFTC’s 2023 case against My Forex Funds was dismissed in 2025, so legitimacy has not been settled by a regulator; it rests on each firm’s terms, payment record and jurisdiction.

Do prop firms give you real money?

Not in the sense of a loan or a deposit. You trade an account the firm controls, often simulated, and receive a share of profits as a payout under its contract.

What is a trailing drawdown?

A loss floor that rises as the account’s best balance rises and never falls back. In the SPY test above, it ended 341 of 651 accounts where a fixed floor ended 195.

Do you need $25,000 to day trade stocks now?

Not under FINRA’s rule, which dropped the $25,000 pattern day trader minimum effective 4 Jun 2026; brokers have until 20 Oct 2027 to phase in the new margin standard.

Related

The prop firm challenge is the evaluation, simulated in full. Trading capital is the alternative question: how much of your own money the job actually needs. And risk management is the discipline every rule set here is a crude version of.

This page is educational, not financial advice. Test every idea on your own charts before risking money.