If there’s one point clearly not transparent in the industry, this is how prop firms monetize profitable funded traders.
Obviously these ones need to be paid a certain profit share when they achieve profits with respect of trading rules.
Wheras a young prop firm will exclusively pay them from sales of new challenges (using payout proof as advertisment), a more mature firm should (must !) have another revenue source.
Let’s imagine a firm having 80% of profitable funded traders and only 20% of on-going challenges. If the business model is based on sales only… the company is probably dead already under its own weight (death by ponzi stop).
So… where the money can come from ?
Obvisouly from the market ? By nature, it should be. But no firm (except TopStep maybe) makes you trading directly on real funds. Trades are copied from your demo account to the firm account. Copied 100 ? Probably not ! Unless the firm has enough data and history, their own risk team must filter your trades.
I wonder if anyone has clue (evidence) about how this really works. Maybe some firm represenatives can bring info end explanations (*).
Another revenue source can be swap fee.
When I see firms selling plans with 0% swap fee, 0% commission… and some selling 100% profit share (!). I tend to think that they’re not yet completely long term oriented.
Monetizing profitable traders… in my humble opinion, a key point to sustain the prop firm industry over the long run.
Ideas ? Infos ?
(*) Note to PropTalk team why not inviting official representatives in this chat of the Prop Firms (which you would garantee identity)
Hi HL41, I agree with you with a lot of what you wrote. However, there are many prop firm companies that have an honest and scalable business plan. But yes, most are of the opinion that they remain marketeers with business plans like Ponzi schemes.
Yes, these scaling plans are very attractive. Sometimes I wonder if these are intending to push the funded traders to keep profits on the account rather than withdraw them (to limit their cash outflow). But at the moment, I never scaled up (I take pay outs…). If there’s any scaled up trader around, comments are welcome
On the statistics, forex trading is a difficult career, more than 85% of people who trades are not profitable…so it obvious prop firm makes most of their money off the challenge fee
It’s true that 90% of the firms operate casino-style, banking the challenge fees and financing payouts from those funds, as well as their marketing efforts.
The top players for sure have a monetization structure, such as A-booking some of the traders, as well as mass-data monetization if they have a large enough pool of traders. This helps them position themselves on the market and manage risk better.
On top of that, there’s nothing wrong with the firms operating on challenge fees to support their payouts alone. However, the reason why majority of them fail (or did so far), is because incompetent people stood behind those brands.
For instance, we have seen social media influencers, or “traders” start their own firms/white label brands, without clear understanding of money flow or business menadgement, which inevitably led to failure.
The same would have happened if they opened a lemonade store.
Ask yourself why? The reason is the same as with FTX - if a gambler stands behind a firm and has access to a huge amount of money, it is certain that he will lose his temper at some point and start playing around / trading / gambling with those funds, and the users/customers/traders are the ones who will suffer the most loss.
Another answer to a question of “how PropFirms monetize profitable funded traders” is: through marketing efforts.
On a large enough Discord channel, or social media page, a legitimate verified payout proof of $20-30k, or a few consistent smaller payouts will bring more revenue to the firm from hopeful traders trying to chase the same dream (as they saw someone achieve it and it’s real), than it cost them to pay those profits out.
