Prop Firms Versus the Traditional Forex Broker Model

Two ways of selling leverage to the same person

The retail forex broker and the challenge-based prop firm sell the same underlying thing: the ability to control a position far larger than the money the trader puts in. The broker does it with margin. A client deposits 500 dollars, the broker extends leverage of 1:30 or 1:500 depending on the entity, and the client trades a position of 15,000 or 250,000 dollars in notional value, keeping the profit and bearing the loss down to the deposit.

The prop firm does it with a contract. A trader pays a fee, typically between 50 and 1,000 dollars depending on the notional account size, to attempt an evaluation on a demo account with a profit target, a daily loss limit and a maximum drawdown. A trader who passes is given a funded account, which at most firms is also a demo account whose trades the firm may or may not copy into a live market, and is paid a share of the profits, commonly 70 to 90 percent, as long as the rules are kept. The firm keeps the fees of everyone who fails, which public statements from the largest firms and the data leaked or disclosed in the 2023 and 2024 regulatory actions suggest is the large majority of attempts.

Neither party would put it this way in marketing, but the economics are clear. The broker's revenue is a function of how much its clients trade and how they trade it. The prop firm's revenue is a function of how many people attempt the challenge, how many fail and how quickly they try again. One is a trading business with a marketing problem; the other is a marketing business with a trading problem.

How the prop model grew

Proprietary trading firms are old: a trading house that gives capital to traders and shares the profits has existed in futures pits and equities for decades, with the firm selecting and training the trader at its own cost. The retail version inverted that. From about 2015 a few firms, FTMO in Prague the best known, began charging the trader for the evaluation rather than bearing the cost of selection, and running the whole process online on MetaTrader demo servers.

The model spread quickly for three reasons. The first is that a demo-based challenge costs almost nothing to run: a white-labelled MetaTrader 4 or 5 server licence, a payment processor and a dashboard. The second is that the message resonated with retail traders who had been told by every broker's risk warning that most people lose money: rather than risk your own savings, pass a test and trade someone else's. The third is that it gave affiliates and trading educators a product to sell that paid a commission on every attempt rather than on the rarer event of a funded broker account.

By 2023 the trade press was reporting hundreds of firms, the largest of them, FTMO, The Funded Trader, My Forex Funds, Funded Next, True Forex Funds and E8, each claiming tens of thousands of paying participants. Finance Magnates and other outlets estimated the sector's annual revenue in the hundreds of millions of dollars. Brokers noticed because their own acquisition data showed traders, particularly younger ones in the same emerging markets that drive broker growth, spending their first trading money on challenge fees rather than deposits.

The 2023 and 2024 shocks

Two events in quick succession exposed the model's dependencies. In September 2023 the Commodity Futures Trading Commission and the Ontario Securities Commission moved against My Forex Funds, one of the largest firms, alleging that it had taken the opposite side of its customers' trades, used software to manipulate their results and misrepresented the funded accounts as live. The firm's assets were frozen and it shut down. The allegations were contested and the case was later marked by procedural disputes over the CFTC's conduct, but the immediate effect was that every firm marketing to Americans had to answer whether its funded accounts were real.

In February 2024 MetaQuotes, the company behind MetaTrader, stopped supplying platform licences to prop firms serving US residents and, according to trade press reports at the time, required white-label providers to disconnect them. Within weeks the largest firms had either dropped US clients, moved to alternative platforms such as cTrader, DXtrade, Match-Trader and TradeLocker, or paused operations. The Funded Trader, which had been among the three largest, suspended payouts and later restructured. The episode showed that the whole sector had been running on infrastructure that a single vendor could switch off, and that MetaQuotes, itself under pressure over how its platform was being used, was willing to do so.

The firms that survived did three things. They diversified platforms. They moved payouts and rules onto firmer legal ground, replacing the vague promise of funding with contracts that describe the funded account as a simulated environment and the payout as a performance-based fee. And several sought licences or partnerships with licensed brokers so that the trading behind the largest funded accounts could be real and hedged.

How brokers have responded

The broker response has run along three lines. The first is to build a prop offer of their own. Hantec Markets, Axi (through Axi Select), OANDA (through its OANDA Prop Trader programme), Blueberry Markets, IC Markets through partnerships, and several others launched funded-trader programmes between 2023 and 2025, with the twist that a broker can fund a trader on a live account, hedge the risk and earn spread and commission on the flow. A broker can afford to offer better payout terms than a pure prop firm because it has a second revenue line the prop firm lacks.

The second is to supply the prop sector. Brokers and their technology arms, notably the liquidity and platform businesses attached to groups such as Finalto, FXCM Pro, IS Prime and cTrader's owner Spotware, have found that prop firms are customers for exactly the servers, liquidity and risk tools brokers already run. When MetaQuotes stepped back, the alternative platforms grew on prop demand, and cTrader in particular has described prop firms as a material part of its growth.

The third is competitive marketing. Brokers have started to argue in their own content that a funded account is a demo account with a fee attached, that the profit split and rules make the trader's expected return lower than a small live account at 1:500, and that a challenge fee is money that cannot be withdrawn. Prop firms reply that a live account at 1:500 is how most retail traders lose their savings in a month, which the brokers' own risk warnings support.

What the regulators have said

Regulation of challenge-based prop trading is unsettled and differs by jurisdiction, which is the same condition that drove the offshore broker industry a decade earlier.

• United States: the CFTC's action against My Forex Funds treated the firm as an unregistered retail forex dealer because, it alleged, the funded accounts were live and the firm was the counterparty. The NFA has since reminded members that a prop firm taking the other side of trades is dealing. A firm whose funded accounts are genuinely simulated sits outside CFTC jurisdiction, which is why the sector has converged on describing them that way.
• European Union: ESMA said in 2024 and 2025 that it was examining prop trading firms and that some of their activity could fall within MiFID II if it amounted to portfolio management, dealing on own account or the provision of a financial instrument. CySEC issued a circular to Cypriot investment firms about their relationships with prop firms, and Czech and Polish regulators, whose countries host several large firms, have published consumer warnings describing the challenges as gambling-like.
• United Kingdom: the FCA has not published prop-specific rules but has warned consumers about unauthorised firms offering funded accounts and has said that a firm dealing in CFDs with UK retail clients needs authorisation regardless of what the account is called.
• Australia: ASIC has said that a prop firm whose funded accounts are real is providing a financial product and needs a licence, and has warned about firms marketing to Australians from offshore.
• Elsewhere: the Dubai Financial Services Authority and the Securities Commission of Malaysia have both issued investor alerts about prop firms, and Belize, the Seychelles and Mauritius have seen firms seek the same licences brokers hold.

The direction is towards treating a funded account as a financial product when it is real and as a consumer contract, possibly a game of skill, when it is simulated, with disclosure rules in either case. That would leave the simulated model legal but obliged to say plainly what it is, which is the outcome the surviving large firms have already priced in.

What it means for the trader

For the retail trader the comparison is about expected value and about what happens when things go wrong. A challenge fee is spent whether the trader passes or fails, and the pass rate at most firms is low. A funded account can be withdrawn by the firm for a rule breach that the trader may not have noticed, and payouts have in several documented cases been delayed or refused when a firm was in difficulty. Against that, the trader's loss is capped at the fee, which is usually smaller than the deposit a broker would need to trade the same position size, and the rules impose a discipline about drawdown that brokers do not.

A live broker account offers the reverse. The trader keeps every dollar of profit, can withdraw at any time from a regulated entity, and is protected by negative balance rules and, in some jurisdictions, compensation schemes. The trader also bears every dollar of loss, and at the leverage available offshore that loss can arrive fast. Neither model changes the underlying difficulty of trading profitably, and a trader who cannot pass a challenge is unlikely to prosper on a live account either.

Where the two models are going

The most likely outcome is convergence. The largest prop firms are acquiring or partnering with licensed brokers so that they can offer real funded accounts where regulation allows and simulated ones where it does not. The largest brokers are running funded programmes as a customer acquisition channel that costs less than a cost-per-acquisition affiliate deal and delivers a trader who has already proved some discipline. Platform vendors serve both. Within a few years the question of whether a firm is a broker or a prop firm may matter less than which entity a trader is contracting with and whether the account is real, which is the same question this site already asks about every broker.

Sources

• US Commodity Futures Trading Commission, complaint and orders in CFTC v. Traders Global Group (My Forex Funds), 2023 onwards
• Ontario Securities Commission, proceedings against Traders Global Group, 2023
• European Securities and Markets Authority, statements on proprietary trading firms, 2024 and 2025
• Cyprus Securities and Exchange Commission, circular on cooperation with prop trading firms
• Czech National Bank and Polish Financial Supervision Authority consumer warnings on funded-trader challenges
• UK Financial Conduct Authority and Australian Securities and Investments Commission consumer alerts on prop trading
• Trade press reporting on MetaQuotes' 2024 withdrawal of licences from US-facing prop firms, including Finance Magnates and FX News Group
• Public statements, terms and payout policies of FTMO, The Funded Trader, Funded Next, E8 Markets and Topstep
• Broker announcements of funded-trader programmes from Axi, OANDA, Hantec Markets and Blueberry Markets

This paper consolidates publicly available information as at its publication date. It is research and commentary, not investment advice, and is revised when the sources it draws on are updated. Corrections are welcome through the contact form.