Few questions in trading attract as much heat as this one, partly because “prop trading” means two very different things depending on who’s asking. To one person it’s a Wall Street bank betting its own balance sheet on market moves. To another it’s a website selling $200 evaluation challenges to retail traders who want a shot at a funded account. Both get called prop trading, and both have been the target of calls for bans, restrictions, and tighter oversight.
This article walks through what prop trading actually is, why some regulators and commentators want it banned or curtailed, and the arguments made on the other side. It reports the debate rather than taking a position on it.
What “Prop Trading” Actually Means
Proprietary trading, or prop trading, is the practice of trading financial instruments or commodities as principal, using a firm’s own capital rather than trading on behalf of a client. The profits and losses accrue to the firm itself, which is what separates it from agency brokerage and asset management, where the money belongs to customers.
In its institutional form, prop trading is carried out by investment banks, broker-dealers, market makers, and independent principal trading firms across equities, fixed income, derivatives, commodities, and foreign exchange. It can involve discretionary traders, algorithmic and high-frequency strategies, statistical arbitrage, market-making inventory, or longer-horizon directional bets.
There’s a second, newer use of the term. In consumer finance, “prop trading” now also describes retail-facing “funded trader” businesses. These programs typically charge an aspiring trader an evaluation fee and promise access to a funded account or profit share if the participant hits trading targets while staying inside risk limits. Press coverage has described many of these programs as operating through simulated accounts during the evaluation stage, with critics pointing to the fees, low payout rates, and the difficulty of staying profitable. Business Insider has reported the retail funded-trader space as a roughly $12 billion industry. These retail programs are distinct from institutional prop trading, even though they borrow the same vocabulary.
When people argue about whether prop trading “should be banned,” they’re often arguing about different animals. It helps to separate the two.
The Institutional Debate: Banks and the Volcker Rule
The most prominent restriction on prop trading anywhere is the Volcker Rule in the United States. Named after former Federal Reserve chairman Paul Volcker and enacted as section 619 of the Dodd-Frank Act, it generally prohibits banking entities from proprietary trading and from sponsoring or investing in covered hedge funds and private-equity funds. It was implemented jointly by the Federal Reserve, the CFTC, the FDIC, the Office of the Comptroller of the Currency, and the SEC.
Notice what the Volcker Rule does and doesn’t do. It’s aimed at banking entities, not at everyone. Independent prop trading firms, hedge funds, and other non-bank players can still trade for their own accounts, subject to the usual securities, commodities, market-abuse, capital, and reporting rules. The reason banks are singled out is that they have access to deposit insurance, the Federal Reserve discount window, and other forms of public support. The worry is that this public backstop could end up subsidizing speculative trading.
The case for restricting bank prop trading rests on three ideas. First, systemic risk: when trading losses land inside an institution that also takes deposits and runs payment systems, the damage can spread. Second, moral hazard: public guarantees may quietly encourage more risk-taking than a firm would otherwise choose. Third, conflicts of interest, where a bank trades for its own book while also advising clients, executing their orders, making markets, and publishing research. A 2018 study in The Journal of Finance examined German universal banks and found they sold stocks from their proprietary portfolios to retail customers, that those stocks then underperformed, and that retail customers of prop-trading banks earned lower portfolio returns than comparable investors.
Other jurisdictions reached for different tools rather than an outright ban. The United Kingdom chose ring-fencing, in force since 1 January 2019, which requires the largest banking groups to separate core retail banking from investment-banking activities instead of prohibiting principal trading outright. When the UK’s Prudential Regulation Authority reviewed proprietary trading in 2020, it concluded it already had the supervisory powers needed and didn’t require new ones. In the European Union, the 2012 Liikanen report recommended mandatory separation of prop trading from deposit-taking inside large banks, but the resulting legislative proposal was withdrawn by the European Commission in 2018.
The Case Against a Ban (Institutional Side)
Supporters of principal trading argue that firms willing to commit their own capital improve liquidity, narrow bid-ask spreads, and support price discovery. Market makers provide immediacy by buying when clients want to sell and selling when they want to buy, absorbing inventory risk that would otherwise sit with end investors. Electronic prop firms can also knit fragmented markets together by arbitraging related instruments and updating prices quickly across venues.
There’s evidence that restrictions carry costs. A Federal Reserve working paper by Bao, O’Hara, and Zhou found that, in the corporate bond market, bonds hit by stress events became less liquid after the Volcker Rule, with affected dealers pulling back from market-making and other dealers only partly filling the gap. The PRA made a related point: broad restrictions on all principal trading could interfere with genuinely useful hedging and liquidity functions, since market making and risk management also require firms to hold positions and bear risk. Where you draw the line between speculative prop trading and legitimate client facilitation is one of the hardest problems regulators face, because the same desk and the same position can serve either purpose.
The Retail Debate: Funded-Trader Firms
The louder version of “should prop trading be banned” today is usually aimed at retail funded-trader firms, and the regulatory mood there is markedly more skeptical.
European regulators have been blunt. One industry report described European authorities as effectively waging war on proprietary trading firms, characterizing their operations as akin to video games that cost investors money and lead to reckless behavior. That framing points to the central dispute: are these businesses a financial service or a form of online gambling?
The classification matters enormously. Most retail prop firms currently operate without financial regulation. In the US they’ve generally avoided SEC broker-dealer rules, CFTC registration as Futures Commission Merchants, and NFA oversight, on the basis that they’re providing educational services and trading their own capital rather than managing client funds. Critics argue the model tells a different story. Since the evaluation accounts are frequently simulated, the firm earns much of its revenue from evaluation fees and subscription renewals rather than from live market trading, with a high share of challenges failing. The CEO of Devexperts, Evgeny Sorokin, has argued that rules around prop firm operations might fit gaming and gambling legislation better than financial regulation. DailyForex has described retail prop trading as a troubling gamification of trading that belongs under gambling oversight.
A wave of warnings and actions has followed. Italy’s Consob issued warnings about prop firm risks in July 2024, with Belgium’s FSMA and Spain’s CNMV raising similar concerns. ASIC in Australia warned financial influencers in 2025 about promoting prop trading without proper disclosures. MetaQuotes, the company behind the MT4 and MT5 platforms, conducted a major crackdown in February 2024 that forced firms to suspend or restructure their offerings, and an estimated 80 to 100 prop firms closed across 2023 and 2024 as conditions tightened.
The pressure has built alongside fast growth. By one measure the prop trading industry expanded by 1,264% between December 2015 and April 2024, far outpacing growth in traditional investing, which is the kind of expansion that draws regulatory attention.
The Case Against a Ban (Retail Side)
The arguments made on the other side tend to run as follows. The product is, on its face, disclosed: participants pay a fee to attempt a challenge with stated targets and risk rules. Supporters argue that’s a defined service rather than a regulated investment, which is the basis on which evaluation firms have operated legally in the UK and elsewhere. There’s also a consumer-choice argument, that adults can decide for themselves whether to pay for a skills-based challenge.
Rather than an outright ban, much of the actual regulatory direction points toward tighter rules rather than prohibition: clearer disclosure of fees and payout statistics, stricter KYC and anti-money-laundering checks, more transparency around profit-split marketing claims, and, in the US, a live question over whether evaluation firms offering futures access should be classified as Commodity Trading Advisors and made to register with the CFTC and NFA. The FCA published a review of algorithmic trading controls among principal trading firms in August 2025, and the SEC adopted rules in February 2024 broadening the definition of “dealer,” though those target traditional prop shops more than retail evaluation firms. The common thread is that regulators are reaching first for licensing, disclosure, and consumer-protection requirements, with an outright ban remaining the more extreme end of the spectrum.
So, Should It Be Banned?
The honest answer is that the question splits into several smaller ones, and the people debating it often aren’t talking about the same thing.
For banks, the policy world has largely already answered: not a blanket ban on all principal trading, but restrictions on speculative own-account trading by institutions that enjoy public backstops, implemented through the Volcker Rule in the US and ring-fencing in the UK. Even there, the recognition that market making and hedging look a lot like prop trading has kept the rules narrower than a total prohibition.
For independent institutional prop firms, the prevailing view is that they trade their own money and don’t pose the deposit-insurance problem that justifies restricting banks, so they remain legal under general market rules.
For retail funded-trader firms, the debate is live and unresolved. The core fight is whether they’re a financial service, a gambling product, or something that needs a category of its own, and that classification will shape whatever rules emerge. The clearest near-term trajectory is toward licensing, disclosure, and consumer-protection requirements rather than an outright ban, though some regulators clearly view the model with deep suspicion.
If you’re weighing the question for yourself, the useful move is to be specific about which prop trading you mean. The arguments for and against look quite different once you separate a bank’s trading desk from a website selling evaluation challenges.
This article describes a regulatory and policy debate and reports the positions various parties have taken. It isn’t financial, legal, or investment advice.