Are Prop Firms Legal in the US?

Prop firms are regarded for their potential to provide traders with remarkable returns. They allow traders to use the firm’s capital to enter positions. A legitimate prop firm can be highly profitable for individuals, as many provide traders with significant profit splits.

However, prop firms often fall under scrutiny due to operating in what many would consider a legal gray area. This leads many to wonder whether or not prop firms are legal in the USA and if trading as a part of one is a legitimate option. In other words, can you be a funded trader in the USA?

The simple answer is yes. Prop firms are legal in the USA so long as they meet several requirements and follow strict regulations.

Contents

• Key Takeaways
• What Are Prop Firms?
• Benefits of Funded Trading Through a Prop Trading Firm
• Regulatory Landscape for Prop Firms in the US
• Are US-Based Prop Firms Legal?
• Risks and Challenges of Trading with US Prop Firms
• What to Look for in a Legitimate US Prop Firm
• Is Becoming a Funded Trader with a US Prop Firm Worth It?
• Frequently Asked Questions

Although prop firms are legal in the USA, they must maintain high ethical standards to continue operating. Thus, individuals can engage in funded trading in a safe and secure manner.

Keep reading to learn about prop firms, whether they are legal, and what rules they must follow to remain legally compliant. This article will also cover various alternatives to prop firm trading, such as becoming a funded trader.

So, what are prop firms? 

Key Takeaways

• Funded trading with a prop firm allows traders to access firm capital without risking their own funds.
• Prop firms often provide profit-sharing arrangements, giving traders an incentive to perform well.
• The Photon trading course offers essential training, preparing traders for the demands of prop firm trading.
• U.S. prop firms must adhere to specific regulatory requirements, depending on their operations and services.
• Online prop firms can pose additional challenges, such as transparency and regulatory gaps, requiring thorough vetting.
• Prospective traders should check for a firm’s registration, transparency, and track record before joining.

What Are Prop Firms?

Proprietary trading firms, or prop firms, are companies that provide capital to traders to trade financial markets on behalf of the firm. These traders are known as funded traders.

Unlike traditional financial institutions that trade on behalf of clients, prop firms generally use their funds and retain the profits their traders generate.

Those trading for prop firms typically receive a percentage of the profits generated through successful positions, often well over 50%. However, the profit split depends on the prop trading firm.

This makes prop firms attractive to skilled traders who need more capital to trade independently at a significant scale.

Furthermore, prop firms typically have rigorous selection processes, often involving trading challenges or assessments to identify skilled traders.

Once accepted, traders have access to the firm's capital and trading infrastructure, allowing them to take larger positions than they could with personal funds alone.

Let’s move on and discuss some of the most well-known prop firms with proven results to provide you with some perspective of the landscape. 

Examples of Well-Known Prop Firms

Two of the most well-known prop firms in the USA include TopstepTrader and the T3 Trading Group, which have maintained high standards throughout the years.

Here’s a quick overview of both:

TopstepTrader

Established in 2012, TopstepTrader operates with a unique “Combine” program. This program allows traders to prove their skills in a simulated environment before potentially earning a funded account.

This model is geared toward those looking to refine trading skills without significant personal capital risk. Traders must meet specific performance and risk criteria.

Although Topstep provides some educational tools and a clear structure for advancement, some may find the evaluation requirements challenging and the program fees high if they don’t advance.

T3 Trading Group

T3 Trading Group, with offices in New York and London, is a prop firm that offers access to equities, options, and futures markets.

T3’s approach includes limited educational resources and support for a range of trading strategies, though some may find the scope of training limited compared to specialized firms.

Its compliance with regulatory standards makes it a viable option for traders interested in working with a regulated U.S.-based firm.

With some of the most notable prop firms covered, let’s examine what the top benefits of funded trading through a prop trading firm are. 

Benefits of Funded Trading Through a Prop Trading Firm

Funded trading through a prop trading firm provides traders access to professional capital and resources, allowing them to engage in the financial markets with reduced personal risk and enhanced growth opportunities, among many other benefits.

Here’s a detailed overview of the benefits of funded trading with a prop firm:

Access to Significant Capital Without Personal Risk

One of the main advantages of trading with a prop firm is the ability to access substantial capital provided by the firm itself, which allows traders to participate in the markets without risking their own funds.

Instead of requiring large amounts of personal investment, traders can join prop firms with minimal upfront costs, making it a feasible entry point for those new to trading or looking to transition into a trading career.

Professional Training and Skill Development

Many prop firms invest in developing their traders, offering structured training programs, mentorship, and professional resources to enhance their trading skills.

Prop firms frequently provide skill-building programs that teach effective trading strategies, risk management, and market analysis techniques. However, for a fully comprehensive FX trading course, Photon Trading is your best option. 

Opportunity to Earn Through Profit-Sharing

Prop firms typically operate on a profit-sharing model, where traders keep a portion of their profits. This arrangement allows traders to earn based on performance, motivating them to achieve consistent profitability.

Unlike a fixed salary, profit-sharing creates a flexible income stream that rewards successful trading and high performance. This model incentivizes traders to continually improve their skills, as higher profitability directly translates into increased earnings.

For motivated traders, the profit-sharing structure is a compelling feature of funded trading, as it directly rewards skill, consistency, and dedication to improvement.

Access to Professional Tools and Technology

Trading with a prop firm often provides access to advanced trading tools, software, and platforms that might otherwise be too costly for individual traders. These professional resources enable sophisticated analysis and efficient trade execution.

Prop firms offer traders access to professional-grade trading platforms equipped with enhanced data feeds, real-time analytics, and advanced charting tools.

They also provide excellent risk management systems, helping traders monitor and manage their positions effectively. Access to such resources is invaluable for traders aiming to optimize their strategies and make data-driven decisions, significantly improving their trading capabilities.

Structured Risk Management and Accountability

Prop firms enforce structured risk management policies to protect their capital and ensure that traders develop disciplined habits. These practices benefit traders by promoting responsible trading and fostering long-term growth.

Defined risk parameters, such as specific loss limits and drawdown controls, help traders maintain discipline and avoid excessive risk-taking.

Moreover, by closely monitoring trading performance, prop firms create an environment that encourages accountability and responsible trading practices.

Flexibility and Independence

Prop firms generally allow traders a degree of independence in their trading styles and schedules, creating an environment that balances professional accountability with personal freedom.

Unlike traditional employment, where schedules and roles are often fixed, funded trading through a prop firm allows traders to pursue their preferred strategies, whether that’s day trading, swing trading, or long-term position trading.

This flexibility also means that traders can work on their own terms, tailoring their trading activities to fit their lifestyle and personal goals, making prop trading an appealing option for those seeking both professional and personal autonomy.

Now that you know why becoming a funded trader can be so beneficial, let’s examine the legal landscape surrounding prop firms in the USA. 

If you want to become a funded trader, start learning the most important trading skills today with Photon Pro.

Seeing as funded trading has numerous benefits for both beginners and seasoned traders alike, you’ll likely want to start trading right away. However, before you do so, knowing the regulatory landscape surrounding prop firms in the USA is a must. 

Regulatory Landscape for Prop Firms in the US

The regulatory framework governing proprietary trading firms in the United States is complex. Oversight is primarily centered on firms’ trading activities, the assets they handle, and how they structure their operations.

To be clear, prop trading firms are legal in the USA as long as they adhere to various laws and standards. Therefore, becoming a funded trader with a legitimate prop firm can be a viable money-making opportunity.

However, to ensure that you are getting on board with a legitimate and trustworthy prop firm, there are various legal aspects that you must be aware of, starting with the overall legal status of prop firms in the USA. 

Legal Status of Prop Firms in the United States

In the U.S., prop firms are legal entities that primarily trade the firm’s own funds rather than those of external clients. This enables them to avoid certain regulatory requirements that apply to retail brokerages.

However, their legality hinges on compliance with specific financial and operational regulations, depending on the type of assets traded (securities, futures, or commodities) and the firm’s business model.

Prop firms are generally only classified as broker-dealers if they handle customer accounts or directly facilitate client trades. Instead, they focus on using proprietary capital, which exempts them from some regulations under the Securities Exchange Act of 1934 that apply to retail brokerage firms, with registration being one of these exemptions.

Nonetheless, if a prop firm crosses into areas like providing advice on investment or trading client funds, it may be required to register as a broker-dealer or adhere to additional regulatory standards.

Therefore, we must discuss when prop firms are required to register and adhere to specific guidelines and when they are not. Before we can do that, we have to discuss the main regulatory agencies.

Main Regulatory Agencies Involved in Prop Firm Trading

Both online and traditional prop firms in the U.S. must follow regulations if they engage in activities that trigger oversight requirements. The three main regulatory bodies involved include the SEC, the CFTC and NFA, and FINRA.

Here’s a breakdown of each body and what it entails:

U.S. Securities and Exchange Commission (SEC)

If a firm trades in securities (like stocks or options), it may need to register with the SEC, especially if it operates in a way that resembles a broker-dealer or if it handles client funds. Both online and traditional prop firms must avoid certain activities, like taking client deposits, to remain exempt from broker-dealer registration.

Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA)

For firms trading futures or commodities, CFTC and NFA oversight applies equally to online and traditional firms, particularly if they meet the thresholds requiring registration as a futures commission merchant (FCM) or commodity trading advisor (CTA).

Financial Industry Regulatory Authority (FINRA)

Although primarily concerned with broker-dealers, FINRA may oversee prop firms that engage in securities trading in a broker-dealer-like capacity. If a prop firm offers brokerage-like services or provides trading accounts that handle customer money, it must register and comply with FINRA regulations.

Now that we know the main regulatory bodies, let’s discuss when prop firms do and do not require registration and oversight. 

When Prop Firms Don’t Require Registration

Many prop firms can avoid registration if they strictly limit their activities to trading only the firm’s capital, without accepting outside funds or providing brokerage services.

These are the requirements that a prop firm in the USA must meet in order to avoid registration:

Self-Funded Trading Only

A prop firm that trades its own capital and does not act as a broker-dealer or manage outside funds generally operates outside of SEC and FINRA regulations for broker-dealers.

No Client Deposits or Accounts

By avoiding handling client funds, these firms can structure themselves purely as proprietary trading firms, which exempts them from many regulatory requirements that apply to firms handling customer accounts.

Simulated Evaluation Programs

Some online prop firms avoid regulatory requirements by providing “simulated” evaluation environments rather than actual funded accounts, classifying their services as training rather than brokerage.

However, these firms must be cautious to avoid misleading traders about the nature of their programs.

When Prop Firms Require Registration and Oversight

Although prop firms aren’t always closely regulated and don’t always have to be registered, there are many cases in which this is necessary.

For instance, if a prop firm trades on behalf of clients using client funds, they must register as a broker. This is just one of the many nuances to be aware of, as listed below. 

Handling Client Funds or Acting as a Broker-Dealer

A prop firm that collects deposits from clients, manages client accounts, or facilitates trades on 

behalf of clients will generally need to register as a broker-dealer with the SEC and FINRA.

Broker-dealer registration includes compliance with strict financial, operational, and anti-fraud rules and may require adherence to anti-money laundering (AML) programs, regular financial reporting, and periodic audits.

Providing Investment Advice or Managing Client Portfolios

Firms offering advisory services related to trading strategies, asset allocation, or portfolio management may need to register as investment advisers with the SEC, particularly if they charge fees for advisory services.

If a prop firm crosses into advisory activities, the SEC mandates specific disclosures, including risks, fees, and potential conflicts of interest.

Pooling Capital and Engaging in Commodity/Futures Trading

Prop firms that pool funds for commodities or futures trading may be classified as commodity pool operators (CPOs) and must register with the CFTC and NFA.

CPOs must adhere to disclosure, reporting, and recordkeeping requirements to ensure investor protection and operational transparency.

Securities Trading

Prop firms that trade in securities may need to register with the U.S. Securities and Exchange Commission (SEC) and become members of the Financial Industry Regulatory Authority (FINRA) if they handle client funds, directly interact with public investors, or provide trading advice.

Are US-Based Prop Firms Legal?

The short answer is yes, US-based prop firms are legal if they adhere to the above mentioned rules and regulations. That said, prop firms can take physical form in terms of a brick-and-mortar location, or may be online.

Both physical and virtual prop firms are subject to the same rules and regulations to keep traders safe. However, as you’ll see below, there are certain challenges that regulators and traders alike face in terms of online prop trading firms.

Those wishing to become funded traders with online prop trading firms must take extra caution to ensure that the firm is legitimate. Let’s examine both brick-and-mortar and online prop firms for a better understanding. 

Traditional Brick-and-Mortar Prop Firms

Traditional prop firms, with physical trading floors and established infrastructures, generally operate within the legal framework set by financial regulators.

These firms are often subject to oversight from the CFTC and SEC, ensuring they comply with regulations designed to protect market integrity and prevent fraudulent practices.

Many traditional prop firms have long histories and have adapted to regulatory changes over time. They often have strong compliance departments to ensure adherence to legal requirements, such as registration, reporting, and risk management protocols.

Traders joining traditional prop firms can have greater confidence in the firm's legal status and compliance with regulations. However, it's still important to conduct due diligence and understand the specific terms of any trading agreement before committing capital.

That said, although online prop firms can indeed be legitimate, they present additional challenges for regulators and traders alike. 

Online Prop Firms

The rise of online prop firms has created new challenges for regulators. Many of these firms operate in a gray area, with limited oversight and a lack of clear regulations governing their activities. 

Possible Issues with Online Prop Firms

Online prop firms sometimes get away with things that physical prop firms cannot, leading many to question their integrity. Although many legitimate online prop trading firms exist, some have also been known to engage in shady practices, such as making misleading claims and charging hidden fees.

Here are some of the possible fraudulent activities or scams that an online prop trading firm which is not regulated and registered may attempt to get away with:

Misleading Marketing Claims

Many online prop firms advertise guaranteed profits, unrealistic returns, or “risk-free” trading, which can mislead novice traders. Claims that traders can “easily” qualify for a funded account or will make high returns often overlook the fees and risks involved, resulting in disappointment or loss for participants.

Hidden or Exorbitant Fees

Some firms charge high fees for training or evaluation programs that may be designed to maximize revenue rather than genuinely offer funding opportunities. Hidden costs for evaluation resets, account maintenance, or withdrawal fees are also common complaints among traders.

Evaluation Programs with Low Pass Rates

Certain firms set evaluation criteria that are extremely difficult to meet, meaning few traders qualify for funding. These firms may make most of their revenue from evaluation fees rather than actual trading profits, with little intention of providing funded accounts.

Lack of Funding or Risk Management Standards

Some fraudulent firms do not back traders with real capital. Instead, they simulate trades within their own systems and profit from fees rather than actual trading results. This practice gives the illusion of trading without real market exposure, raising questions about the firm’s legitimacy.

Some online prop firms have been scrutinized for offering high leverage, engaging in aggressive marketing tactics, or failing to segregate client funds properly. These practices can risk traders' capital and violate securities or commodities laws.

Risks and Challenges of Trading with US Prop Firms

While prop trading can offer attractive opportunities, it's important to understand the potential risks and challenges involved, particularly when dealing with US-based prop firms.

These include regulatory gaps, limited legal recourse, compliance burdens, and transparency issues, particularly with online prop firms, which may operate in unregulated or minimally regulated environments.

Here are the various risks and challenges associated with US prop firms:

Lack of Regulatory Oversight

Most brick-and-mortar prop firms in the U.S. are subject to clear regulatory guidelines, as they are typically based in a single jurisdiction and are more likely to come under direct scrutiny from authorities like the SEC, CFTC, or FINRA.

These firms, especially those involved in regulated securities or commodities, often comply with oversight standards to avoid potential penalties or legal risks.

However, even some physical prop firms that strictly use firm capital for trading may not require registration as broker-dealers, allowing them to operate with limited regulatory oversight. The real issue, however, is with online prop firms, which face several more issues, as detailed below.

Unique Regulatory Challenges of Online Prop Firms

On the other hand, online prop firms face distinct regulatory challenges due to their remote operations, global reach, and varied business models.

Below are the key reasons why online prop firms are difficult to regulate effectively.

Remote Operations and Global Reach

Online prop firms serve traders worldwide and often lack a physical presence in any one regulated jurisdiction. Without a base within a specific country, these firms frequently evade direct oversight by U.S. regulators, such as the SEC, CFTC, or FINRA.

The cross-border nature of online firms results in a patchwork of regulatory protections that vary depending on each country’s standards, reducing consistent safeguards for traders and complicating enforcement efforts.

Operating Models That Sidestep Registration

Many online prop firms design their business models to avoid regulatory registration.

By framing their services as “evaluation-based” or “simulation-based” rather than actual funded trading, these firms argue they do not fall under the traditional definitions of broker-dealers or futures commission merchants.

This approach allows them to legally bypass certain registration requirements, but it also limits trader protections, particularly in areas like risk management and transparent trading terms.

Inconsistent Compliance Standards Across Jurisdictions

The regulatory requirements for prop trading differ across countries, creating further compliance inconsistencies for firms operating in multiple regions.

Some online firms may not adhere to the rigorous standards required of U.S.-based financial institutions, leading to gaps in accountability.

For traders, this results in variable levels of transparency and security depending on the firm’s primary jurisdiction, raising uncertainty about the protections available.

Limited Legal Recourse

Another significant challenge when trading with U.S. prop firms is the limited legal recourse if something goes wrong. Regulated financial institutions are bound by investor protection laws and clear legal frameworks that allow clients to seek compensation in cases of fraud or misconduct.

However, prop firms often use complex legal structures that make it difficult for traders to pursue legal action in the event of a dispute.

If a prop firm engages in unethical or fraudulent practices, traders may find their options for recovering funds are limited.

This challenge is especially pronounced with online prop firms that may be based in foreign jurisdictions with different legal systems and weaker consumer protection laws.

Before joining a prop firm, traders must review all agreements carefully, understand the firm’s legal status, and consider consulting a legal professional if they have concerns about the firm’s reliability or contract terms.

Compliance Burdens

Trading with prop firms can also introduce compliance obligations, particularly for U.S.-based traders.

Even if the prop firm is legally operating, traders may still be subject to multiple regulatory requirements and reporting responsibilities, including tax obligations and day trading regulations.

For instance, traders may need to report profits earned through a prop firm by filing specific tax forms, such as Form 1099, to comply with IRS regulations. Failure to meet tax reporting requirements can lead to legal and financial penalties.

Furthermore, traders may be subject to the Pattern Day Trader (PDT) rule, which restricts the number of day trades they can make in a margin account.

Violating PDT rules can result in account restrictions or even legal action, underscoring the importance of understanding the compliance landscape before committing to a prop firm.

Traders should consider seeking the advice of tax professionals and legal experts to ensure they fully understand and meet these compliance requirements. This preparation is particularly important as compliance failures can result in penalties impacting trading performance and legal standing.

Limited Transparency and Accountability

Unregulated online prop firms are generally not required to disclose important details, such as fee structures, profit-sharing terms, or associated risks.

This lack of transparency leaves traders in the dark about crucial aspects of the firm’s operations and can expose them to unexpected fees or unfavorable terms.

Without mandated disclosure, traders may find themselves vulnerable to practices that could have serious financial consequences.

Although these issues may make funded trading with a prop firm seem intimidating, as long as you know what to look out for, you shouldn’t have any issues finding a legitimate US prop firm to help you make real profits. 

What to Look for in a Legitimate US Prop Firm

When considering trading with a US-based prop firm, it's important to conduct thorough due diligence to ensure the firm is operating legally and ethically. Prop firms should be registered, transparent, and have proven track records.

Here are some key factors to look for:

Regulatory Registration

Legitimate prop firms in the US should be properly registered with the relevant regulatory bodies, such as the Commodity Futures Trading Commission (CFTC), the Securities and Exchange Commission (SEC), or the National Futures Association (NFA).

Visit the CFTC's website to verify a firm's registration status as a Commodity Trading Advisor (CTA) or Commodity Pool Operator (CPO). Similarly, check the SEC's Investment Adviser Public Disclosure website to confirm registration as an investment adviser.

Before proceeding, check to see what sort of registration and regulation a prop firm features. 

Transparency and Communication

A reputable prop firm should provide detailed information about its trading program, risk management practices, and performance history.

The firm should be transparent about its fee structure, profit-sharing arrangements, and potential conflicts of interest.

Review the firm's website and promotional materials for clear explanations of the trading strategy, risk disclosures, and terms and conditions. If information is vague or missing, or if the firm makes unrealistic promises of guaranteed returns, consider it a red flag.

Segregated Client Funds

If a prop firm engages in both funded trading using only the company’s capital and separate investing and trading on behalf of clients, then funds must be segregated.

A legitimate prop firm will not combine its capital with that of its investors, as this puts investors at risk. Client funds must be kept separate from funding used for funded trading. If a prop firm uses client funds for funded trading, this should also be considered a red flag. 

Proven Track Record

While past performance does not guarantee future results, a prop firm with a proven track record of success is more likely to be legitimate and well-managed.

Research the firm's history, including its length of business, assets under management, and key personnel's experience.

Look for independently verified performance data, such as audited financial statements or third-party performance reports. Be wary of firms that make claims of outsized returns or have a limited operating history, as these could be signs of potential fraud or mismanagement.

By carefully evaluating a prop firm's regulatory status, transparency, fund segregation practices, and track record, you can decide whether the firm is a legitimate and trustworthy partner for your trading journey.

To get the education you need to become a funded trader, start learning today with Photon Pro. 

Is Becoming a Funded Trader with a US Prop Firm Worth It?

Becoming a funded trader with a U.S.-based prop firm offers significant benefits and opportunities. For traders with the necessary skills, trading with firm capital allows access to substantial funds, profit-sharing arrangements, and advanced tools without the financial risk of using personal capital.

This model is quite beneficial, especially for skilled traders looking to scale their strategies and earn based on performance. However, succeeding as a funded trader requires thorough trading knowledge and discipline.

The Photon trading course is a valuable resource. It provides comprehensive trading education that prepares traders to meet the rigorous standards required by top prop firms.

With the right foundation, funded trading with a U.S. prop firm can be an excellent path for those serious about a professional trading career.

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Frequently Asked Questions

What Skills Are Required to Succeed as a Funded Trader?

To succeed, funded traders need a strong foundation in technical analysis, risk management, and strategy development. Many programs, like Photon’s, provide courses to help develop these essential skills.

Are U.S.-Based Online Prop Firms Regulated? 

Yes, some online prop firms in the U.S. follow regulatory standards, especially those handling client funds or offering securities trading. However, it’s crucial to verify a firm’s registration with relevant bodies like the SEC or FINRA.

How Do Profit Splits Work with U.S. Prop Firms? 

Most U.S.-based prop firms offer a profit-sharing model, where traders keep a portion of their profits, typically above 50%, though the exact split varies by firm and individual performance.

Do Funded Traders Have Full Freedom Over Their Trading Decisions? 

Generally, funded traders have freedom within firm guidelines, including risk limits and strategy requirements. This structure allows for some autonomy while ensuring that trades align with the firm’s risk standards.

Is a Trading Course Necessary Before Joining a Prop Firm?

Yes, a solid trading education is essential. Many prop firms require advanced skills, and completing a course like Photon’s can help traders build a robust knowledge base, increasing their chances of success.