What You Should Know About Prop Trading in the United States

The United States is the largest economy in the world and home to some of the most popular financial markets globally. Therefore, the rise of proprietary trading around the world means that the largest prop firms have been interested in entering the U.S. market for years now.

However, the U.S. is also known for its strict financial rules and regulations, which means that very few prop firms can actually be licensed to operate in the country.

For this reason, prop firms active in the United States need to comply with strict regulations, which means that traders based in the United States have access to fewer competing prop firms.

Before we dive deeper into the specific regulations that exist in the U.S. and what traders can expect from prop firms based in the country, let us first overview what prop trading is and how it works.

What is Prop Trading and How Does it Work?

Prop trading has been around for a decade and has been growing in popularity over the past few years. Every year, more and more firms go overseas in search for traders, while offering funded accounts to prospective clients who would like to boost their buying power and trade anything from forex and commodities to crypto and stocks.

Here’s how prop trading works in very simple terms:

• A trader needs additional capital in order to generate substantial returns from their trading activity
• A prop firm has the necessary funds, which they offer in exchange for an account fee and a cut of the profits generated by their traders who have successfully passed the evaluation challenge and demonstrated the ability to trade profitable within the rules and boundaries set by the prop firm
• Once the trader has passed the evaluation, they are able to generate and withdraw profits that they have accumulated at the prop firm
• Prop firms do not solicit brokerage services and do not hold clients’ funds on their accounts

Due to the simplicity of prop trading and the straightforward nature of the rules, many traders can start from as low as $10 to pay for a small funded account and try their luck at securities trading.

However, there are certain nuances to prop trading as well, which we will describe in more detail below.

Prop trading rules and restrictions

In many cases, the maximum amount of funding allocable to a prop trader can range from $100,000 to as much as $1 million and above.

For this reason, prop firms need to regulate the demand for their services and only pick the traders that are able to meet the strict demands proposed by the firms. Some of the most common such rules and requirements include the following:

• The trader must meet the profit target set by the firm before the end of the funding challenge period. The profit target is typically between 8 and 10% of the face value of the account
• The trader must not violate the daily and maximum drawdown limits, which limit the percentage loss a trader can incur on their account, which results in automatic disqualification, after which the trader must pay the account fee again for a retry
• The trader must remain active for the minimum number of days, as required by the prop firm. This ties in with the consistency rule, which states that a single profitable trade must not account for a majority of the overall profits generated by the trader over the course of the funding challenge

Forex Regulations in the United States

As we have already mentioned, the United States is known for its vast licensing and regulatory requirements, when it comes to brokerage firms in the country. Forex and stock brokerage firms need to comply with the following requirements in order to be allowed to offer their services in the country, which include:

• • Registration with the CFTC – The Commodity Futures Trading Commission (CFTC) is the primary regulatory body that oversees the futures and options markets, including in forex
  • Membership with the NFA – The National Futures Association (NFA) is a self-regulatory organization that oversees futures trading in the United States

• Capital Requirements – Forex brokerage firms based in the United States are required to maintain a minimum capital of $20 million, plus additional capital to meet the broker’s liabilities

• Segregated Client Accounts – Forex brokerage firms in the U.S. are required to keep client funds in segregated accounts. This ensure the safety of client funds and prevents misuse

• Leverage Limits – The CFTC restricts the maximum leverage for retail forex traders to 50:1 on major currency pairs and 20:1 on minor pairs to reduce the potential for excessive risk-taking

• Anti-Money Laundering (AML) Policies – Brokers are required to implement robust AML policies in order to detect, prevent and report suspicious activities

• Risk Disclosure Statements – Forex brokers must provide clear risk disclosure documents to their clients, informing them of the inherent risks associated with forex trading, including potential losses

• Trade Reporting Requirements – Brokers are required to maintain accurate records of all transactions and provide regular reports to the CFTC and NFA

• Prohibition of Hedging and FIFO Rules – U.S. regulations prevent forex traders from using certain practices like hedging and mandate FIFO (first in, first out) for trade settlements

• Advertising and Marketing Standards – The NFA enforces strict guidelines on advertising, requiring brokers to provide truthful information and avoid misleading statements

This is not an exhaustive list of every rule and regulation governing forex brokerage firms in the United States. For this reason, setting up a securities brokerage firm in the country can be challenging, while prop trading firms are not subject to as much regulatory scrutiny.

While the registration and transparency requirements are still present, prop firms do not deal in securities, nor do they hold client balances on their accounts. However, it is also worth noting that CFD-s are prohibited in the United States, which limits the selection of instruments prop firms can offer their clients in the U.S.

Paying for a Funding Challenge in the U.S.

Once you have chosen which prop firm you would like to trade with, you can pay for the funding challenge and start making profit.

When it comes to paying for the account, you can choose between your bank account and credit card, an online wallet and payment app, or cryptocurrency.

As long as you have a Visa or Mastercard credit card issued by a U.S. bank, you will be able to pay for the account easily.

On the other hand, clients can choose between the likes of PayPal, Wise, Paysafe, and other digital payment apps.

Alternatively, crypto payments are also accepted by many prop firms, particularly Bitcoin, Ethereum and USDT. Crypto payments are the fastest method of funding when it comes to prop firms.

Tradable Instruments at United States Prop Firms

While prop firms may not offer as many instruments for trading as brokerages, they nonetheless have a decent variety of assets on their lineup.

From currency pairs and indices to stocks and crypto, prop traders can alter their strategies whenever they need to, which is essential for completing the funding challenge and meeting the profit target.

Each instrument available for trading is subject to different leverage limits, which is an important consideration for prospective prop traders.

Forex

Forex trading is the most popular strategy when it comes to prop trading. From major and minor pairs to exotics, traders based in the US can access a wide range of FX markets, with a maximum leverage of 1:50 available.

However, the low margins associated with forex trading means that most traders are likely to require some diversification in order to meet their profit targets in time and successfully pass the funding challenge.

Typically, prop trading firms will offer around 100 currency pairs to their clients.

Indices

Equity indices, such as the US500 and US30, are some of the most popular instruments available to US prop traders.

However, it is worth noting that CFD-s are prohibited in the United States, which means that the instruments covering equity indices tend to be limited in the country.

Indices are particularly attractive to clients that trade at prop firms that do not offer individual stocks.

Crypto

Bitcoin, Ethereum and other cryptocurrencies are also quite popular among prop trading firms. While the selection of tradable cryptocurrencies tends to be limited, they nonetheless provide valuable alternatives for prop traders to access more volatile markets and trade at higher margins.

The leverage available to crypto traders is typically limited to 1:2 and most prop firms offer a few handful of cryptocurrencies, such as: Litecoin, XRP, Tron, DOGE, SHIBA, and others.

Stocks

Stock trading is quite rare among prop firms. The few prop firms that offer stock trades, typically focus on a number of stocks with large market capitalization and a higher degree of liquidity.

The selection of stocks on offer may include the likes of Apple, Amazon, Microsoft, Tesla and other industry giants.

However, most prop firms are unlikely to offer stock trading to their clients, instead focusing on forex and commodities trading.

Commodities

Commodities, such as oil and gas, silver, gold and others are also often offered by prop firms.

However, as CFD-s are not available in the United States, prop firms in the country focus on futures contracts for commodities traders.

The number of tradable commodities is also limited at US prop firms, with a particular emphasis on metals and energies. The leverage available is also typically limited to 1:20.

FAQ on Prop Trading in the U.S.

Is prop trading legal in the United States?

Yes. Prop trading is legal in the United States and subject to considerably less regulatory scrutiny than forex brokerage firms and other financial institutions. Prop firms do not deal in securities brokerage services and do not hold client funds on their accounts.

What can I trade at prop firms in the US?

Prop firms in the US offer different asset classes to their clients, which may include the following: Currency pairs, commodities, indices, cryptocurrencies and, in some cases, stocks.

Can I make money prop trading in the US?

While it is possible to make money using prop trading in the United States, the degree of success depends on the trader and their ability to comply with the limits and requirements of the prop firm of their choice.