Don’t Miss These 3 Main Disadvantages of Prop Trading Firms (2024)

  • No products in the cart.

  • Home
  • Proprietary Trading
  • Don't Miss These 3 Main Disadvantages of Prop Trading Firms
Plus alternatives and potential savings

Don’t Miss These 3 Main Disadvantages of Prop Trading Firms (5)

Many traders are attracted to the seemingly endless buying power and associated unlimited profit potential promised by futures and stock prop trading firms. If it sound too good to be true, it usually is. So what’s the catch here? Let’s explore the major disadvantages of prop trading.

There are three categories that may influence your overall eranings potential when going for a prop firm that need to be evaluated carefully. Among many other potential factors, the main disadvantages of prop trading arise from being classified as a market professional, unfavorable profit sharing, and whether your net trading profits are taxed as capital gains or ordinary personal income.

Who is considered a market professional?

When trading other people’s money, you’re generally considered a market professional by the exchanges. This can have costly consequences and significantly, and often unnecessarily, increase the fixed costs of your trading business.

Especially new traders will find this a steep hill to climb at the beginning of every month. Look at the breakdown of various fees and tax considerations below for potential savings of staying non-pro.

Market data fees

Being classified as a market professional comes at a steep cost. If you want to trade US stocks, basic Level 1 professional data for NYSE and Nasdaq will cost you $96.60/month and quickly go beyond $100 if you add Level 2 data or extra ECNs.

For futures traders, on the other hand, the CME Group has a special treat waiting for professional taders as it still refuses to pass on the the benfits of its merger synergies to end users. Each exchange will set you back $135 per month (it’s Level 2 data for pro). For multi-asset traders this is a whopping $545 just for market data at the CME, CBOT, NYMEX and COMEX.

Don’t Miss These 3 Main Disadvantages of Prop Trading Firms (6)

Alternative: stay non-pro and pay less than $10/month for US stock Level 1 data (NYSE+Nasdaq). As of January 1, 2024, futures traders pay $10 for Top-of-Book Level 1 data for all 4 exchanges that are part of the CME Group. The group bundle for Level 2 data comes at a monthly cost of $39.

Potential savings: $86/month for stock traders requiring only Level 1 data and up to $535 for futures traders because Level 1 only is not available for pro subscribers

Software fees

Many equity prop firms only offer Sterling Trader Pro or Sterling LST to their traders, which can set you back anywhere between $150-280/month depending on your broker. Software rebates are usually only offered for significant trading volume.

In general futures prop traders have a broader range of product offerings to choose from with cost ranging from zero up to $80 per month. The majority of remote prop trading firms offers connectivity through the Rithmic data feed with a dedicated platform at no cost.

Alternative: stay non-pro and trade through our preferred broker Alaric Securities. They also offer Sterling Pro for $150 but their excellent in-house platform HAMMER is priced at $29.95/month with arguably better charting. The Hammer Lite version even offers zero commission trading with no software fee.

For futures traders there is no significant diffence between pro and non-pro pricing.

Potential savings: $120-250/month for stock traders

Profit share

In return for offering higher buying power, equity prop firms keep anywhere from 10-40% of your profits. On the futures side the going rate is from 10-20% of trading profits. If you don’t need hand holding from a prop firm anymore, you should seek out brokers offering equivalent leverage without the dreaded profit share agreement:

NEW! Prop trading with 90-95% profit share and non-pro data feed options at Fondexx:

Available trading platforms:

Trading with more buying power

Fondexx offers 30:1 leverage on the performance bond in the Starter accounts and up to 50:1 in the pro accounts depending on the selected platform.

Available instruments

U.S. stocks, ETFs, options and cryptocurrencies are available at Fondexx. Traders can electronically locate hard-to-borrow (HTB) securities for shorting purposes.

Trading platforms

There is a wide selection of available platforms starting at $40/month from browser-based for MacOS users such as Sterling Web&Mobile to modular Windows-based for the most discerning professional day trader such as Takion or Sterling Trader Pro. Software fees are waived at certain volume thresholds. Check their website for specifics.

Open account at FONDEXX

Best for experienced traders with more than $10,000 of risk capital:

Traders outside of the U.S. have the great advantage over their American competition that accounts below $25,000 are not subject to the pattern day trader (PDT) rule and the 4:1 intraday-margin limitation for non-professional traders.

Alaric Securites offers starting leverage from 6:1 up to 50:1 plus ultra-low volume-based commissions and direct market access, which allows you to route your orders to specific destinations, access various dark pools, and also receive rebates for providing liquidity.

In a nutshell, you’re getting professional conditions without the need of a large account or a prop trading firm.

Available trading platforms:

Trading with flexibility

Get direct market access to self-directed exchanges, dark pools and algo venues. No trades limit, no “per trade” minimums, no PDT rule.

Available instruments

Trade US-stocks, ETFs and options with Alaric Securities. Access stable easy & hard-to-borrow inventory of stocks with no locates fees. Over 5500 stocks available for shorting!

Trading platforms

Get a free demo of HAMMER, a fully customizable, all-in-one professional trading platform which simplifies and empowers your trading experience.

Open account at ALARIC

Alternative: stay non-pro with Alaric Securities and keep 100% of your hard earned trading profits.

Potential savingsanywhere between $1,000-4,000 per $10,000 in net profit.

How are my profits taxed?

When trading through a prop firm you’re an independent contractor or partner in a pass-through entity like an LLC. Consequently, your profits will be taxed at your personal income tax rate instead of a potentially much lower capital gains tax rate.

Capital gains vs. personal income tax

Personal income tax rates vary greatly across the world and the same is true for short- and long-term capital gains tax rates. So please do yourself a big favor and compare the applicable rates in your country to make an educated decision.

The paradox here is that taking the prop trading route for the purpose of increasing the income potential only makes sense if traders are willing to escape the progressive tax rates for higher incomes in their home country.

Alternative: stay non-pro and pay applicable capital gains tax (zero for profits from the sale of securities if you’re lucky enough to trade from Cyprusor Singapore etc.).

Potential savingsper $10,000 in profit: depends on the difference between personal income and capital gains tax in your country.

Capital losses vs. nada

In addition to the profit share, you need to be aware of the fact that offshore prop trading firms “own” your capital losses. I know, nobody wants to talk about losses, but you have to account for all possible scenarios.

Alternative: stay non-pro and carry those unfortunate capital losses forward or backward to other tax years.

Potential savings: depends on how unfortunate your trading year was.

Disadvantages of prop trading – Conclusion

In particular for stock traders. the disadvantages clearly seem to outweigh the few benefits left over in the current remote prop trading business model unless one of the prop trading solutions at Fondexx fits your needs.

For futures prop traders it depends on whether the firm of their choice is a “fake” prop firm which does not need to classify you as a professional because you only trade a simulated account that you don’t have full discretion over.

For example, TopStep will classify you as a professional in the funded account, while other firms like Leeloo or APEX Trader Funding start you out in a funded sim account and then move you over to a “real” prop account once you’re long-term profitable.

So consider staying non-pro and treat yourself to a nice vacation with the substantial savings, compound your winnings to make even more money next year or head straight for a tax haven with sandy beaches and palm trees while keeping a big chunk of your profits!

Please share this post with other traders who may find this information useful.

January 25, 2024

  • remote prop trading

Don’t Miss These 3 Main Disadvantages of Prop Trading Firms (16)



MBA, former equities prop trader at Carlin Financial Group and WorldCo LLC. Now independent trader and mentor. Previously held FINRA Series 3, 7, 55, 63.

Website :

0 responses on "Don't Miss These 3 Main Disadvantages of Prop Trading Firms"

Leave a Message

You must be logged in to post a comment.

  • Posts
  • Understanding Risk Management: Introducing the Kelly Criterion Calculator for TradersFutures Trading
  • Digital Nomad Trader? Embracing Freedom by Traveling Around the World!Futures Trading
  • Navigating Prop Firm Trading Taxes: A Comprehensive Guide for Independent Contractors in the U.S. and BeyondFutures Trading
  • Decoding the WTI Crude Oil Crack Spread: Types, Influential Factors, and Trading Strategies in Energy MarketsFutures Trading
  • Unlocking the Soybean Crush Spread: Understanding, Influencing Factors, and Profitable Trading StrategiesFutures Trading
  • Unpacking the Efficacy of Bookmap Indicator in Financial Markets: Does Order Book History Really Matter?Day Trading Futures Trading Proprietary Trading
  • How does ADHD affect traders and what techniques can I use to overcome these effectsTrader Psychology Trading Psychology
  • 6 Ways to Turn ADHD into Your Strength in TradingDay Trading Trading Psychology
  • When do adaptive order execution algorithms adjust their urgency from passive limit orders to active market orders?Futures Trading
  • How do adaptive order execution algorithms minimize market impact?Futures Trading


algorithmic tradingAutomated tradingBehavioral biasBookmapcompetitive analysisdaytradingday trading forexday trading futuresday trading stocksdelusion of competenceemotional self-regulationforex prop tradingFuturesHeatmapHFTinformed tradersIntellectual trading capitalkelly criterionkelly formulaopportunistic tradersoption open interestorder flowoverconfidenceproprietary tradingprop tradingremote prop tradingseed fundingself-awarenessself-controlTrading as a businessTrading businesstrading glossaryTrading indicatortrading plantrading psychologyTrading toolsuninformed traders

© 2024 All rights reserved.

Don’t Miss These 3 Main Disadvantages of Prop Trading Firms (2024)


Don’t Miss These 3 Main Disadvantages of Prop Trading Firms? ›

Among many other potential factors, the main disadvantages of prop trading arise from being classified as a market professional, unfavorable profit sharing, and whether your net trading profits are taxed as capital gains or ordinary personal income.

What are the problems with prop firms? ›

Limited Control Over Capital and Payouts:

- Traders in prop firms often have limited control over the firm's capital. They may need to deposit their own money as collateral or risk management. - Additionally, payouts are subject to the firm's rules, which may restrict a trader's access to profits.

What are the risks of prop firms? ›

Financial loss – the deposit of prop traders is not insured and may be exposed to fraud and other business risks. This is due to loose regulation, which is why prop traders usually deposit what they can afford to lose – a rule that you should always stick to.

What are the disadvantages of trading companies? ›

Disadvantages of trading as a ltd company:
  • Losses. ...
  • Personal guarantees. ...
  • Visibility of results. ...
  • Withdrawing funds. ...
  • Expenses. ...
  • Administration.

Why is proprietary trading bad? ›

Personal Risk: One of the significant drawbacks of prop trading is the potential personal financial risk. If a trader doesn't perform well, they may lose their deposit, and in some cases, their job. Loss Limitations: Prop firms often implement daily loss limits to protect their capital.

What are the pros and cons of prop firms? ›

At the end of the day, the main advantage of proprietary trading is leverage, and the main disadvantage of proprietary trading is fraud.

How many people fail prop firms? ›

Around 10% pass

According to FTMO statistics, only about 10% of traders are able to pass the funded account challenge at any account level. This means approximately 90% of aspiring funded traders fail the evaluation and are unable to gain access to the firm's capital.

Is prop trading stressful? ›

One of the biggest challenges some prop traders face is excessive anxiety. I know anxiety in trading is natural, but too much of it can ruin prop trading success. As a prop trader, you want to make sure you regulate your stress and anxiety level and stay emotionally healthy as much as you can.

What happens if you fail a prop firm challenge? ›

You lose the fee regardless of what happens in the challenge. You do not need to worry about being on the hook for other losses in your evaluation account. Since they are virtual funds, they are not real losses, either to the prop firm or to you.

What is the best risk management for prop firms? ›

  • Realize that it is impossible to make big money by trading without taking big risks. Making big money creates big risks. ...
  • Take only small risks. ...
  • Take small profits every day. ...
  • Book losses when the market acts against you. ...
  • Stop trading when targets are reached.
  • Never leave positions overnight.
Apr 4, 2024

What is a huge disadvantage of trade? ›

(vi) Foreign trade may completely exhaust a country's natural resources like coal and oil which are irreplaceable. These goods are exported for the sake of profit. But the country suffers in the long run when their source is dried up completely.

What are the disadvantages of free trade to firms? ›

Opponents often assert that free trade invites foreign competition with domestic industries, causing job loss and harming key industries. In some cases, free trade cause manufacturers to move their operations to countries with fewer regulations, rewarding companies that cause pollution or use abusive labor practices.

What are two disadvantages of fair trade? ›

Disadvantages of Fair Trade:

- The product is usually a higher price than a non-fair trade product - the customer pays more meaning often the products do not sell and the farmers do not make the money they thought they would.

What are the disadvantages of trading with prop firms? ›

But there are aspects you need to be aware of (cons)
  • The rules – they need to be clear and easy to understand. ...
  • Minimum trading Days – the prop firm doesn't want you to be a 1-trade-wonder. ...
  • Maximum trading Days – be careful that your trading style will reach the target in the allocated amount of time.

Are prop trading firms legit? ›

Prop businesses nowadays are utterly unregulated and far apart from the banking industry. As a result, these internet prop companies are legitimate and not a fraud. Scammers do exist in the sector, though, and they attempt to exploit the current market because there isn't much oversight.

Are prop firms legal? ›

Currently, online forex prop firms are legal, although there is lacking documentation and regulation for prop firms to follow. It is not illegal to operate or trade with a prop firm. However, where most online prop firms come unstuck is in their business practices and terms of service.

Are prop firms reliable? ›

Prop firms are an excellent source of accessing further capital to increase profit potential. Passing a prop firm's evaluation means reaching a profit target while staying within its risk management rules. Prop firms require traders to use their brokers, which can be positive or negative depending on the broker.

Is working with a prop firm worth it? ›

Is working with a prop firm worth it? There are many unique advantages that make working with a prop firm worth it. These include access to unique software and information, trading with the firm's capital, and cashing in a large portion of your winnings.

Are prop firms a pyramid? ›

There is a very slim likelihood that they will succeed if the prop firm does not have their best interests in mind. Actually, one could compare the 95% of prop companies to a pyramid scheme. They either set you up to fail or compensate you with other traders' losses.

Is it good to trade with prop firms? ›

Greater Profit Potential

Another advantage of prop trading lies in the potential for substantial payouts. Traders have the opportunity to leverage their profits, which means that successful trades can result in significant gains. The absence of hidden or recurring monthly fees can also lead to higher net profits.

Top Articles
Latest Posts
Article information

Author: Greg O'Connell

Last Updated:

Views: 6769

Rating: 4.1 / 5 (42 voted)

Reviews: 81% of readers found this page helpful

Author information

Name: Greg O'Connell

Birthday: 1992-01-10

Address: Suite 517 2436 Jefferey Pass, Shanitaside, UT 27519

Phone: +2614651609714

Job: Education Developer

Hobby: Cooking, Gambling, Pottery, Shooting, Baseball, Singing, Snowboarding

Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.