Why Prop Firms Don’t Want You to Win

Proprietary trading firms like Topstep offer an enticing proposition: trade with the firm's capital and share the profits. But what's the reality behind these offers?

Topstep's Funding: A Closer Look

Public data on Topstep's website as of October 2023 shows about 9,000 accounts funded last month. Using this data, we estimated around 44,986 accounts were funded from January to July 2023(assuming a 5% month-over-month growth rate). This estimation is based on the substantial number reported for October, reflecting a growing trend.

However, it's crucial to note that most of these accounts were Express accounts, not the more coveted Live Funded Accounts. In fact if our estimates are correct , only ~0.71% of traders transitioned to a live funded account during this period - a startlingly low success rate. Topstep themselves publicly state at the bottom of their website that during this period of time (January to July 2023) only 321 traders were moved to a “Funded” Account. The rest were trading their “Express” account.

From January to July 2023 only 25.51% of traders passed their combine. This means on average it takes a trader approximately 4 months to pass. That means you’ll spend roughly $396 before you pass their trading test and get an “Express” Funded account. (this also doesn’t include resets, which cost $99 each time in order to “reset” your account if you mess up).

Payouts Versus Investment

On their website, they claim they’ve sent $16 million in payouts since 2020.

Now let’s generously assume half of the $16 million paid out was awarded in the first half of 2023, the average payout per funded account (including Express) is around $177.83(assuming each of the ~45K accounts had a payout). Against the backdrop of an average cost of $396 just to pass, this suggests a net loss for most traders. And again thats not even including resets or the fact that a HUGE percentage of traders will take significantly longer to pass.

In a minute we’ll get to why its likely so hard for traders to get funded or stay funded

Misleading Account Size

Topstep's "100K buying power" is arguably their biggest marketing ploy. In reality, it's akin to having a $3,000 account (which is your max drawdown) with 33x leverage, not an unusually high leverage in the trading world. To put it into perspective, a $200 account with 500x leverage would be equivalent to a "$100,000" account using Topstep's logic.

Why Is It So Hard To Get Funded And Stay Funded?

Firstly, Topstep's main requirement (the profit target) doesn’t involve just doubling your account. With a "MAX drawdown" of $3,000, traders are essentially required to triple their accounts. This means turning a $3,000 balance into $9,000 – a $6,000 net profit, not just $3,000. Achieving this under Topstep's stringent rules and in the face of market volatility is an incredibly challenging task, pushing traders towards risky behaviors like overtrading or taking disproportionate risks to meet such steep targets.

How Much has Topstep Made from Failing Traders?

From January 1, 2023, to July 1, 2023, Topstep attracted a substantial number of aspiring traders. Assuming a 5% month-over-month growth, our estimates suggest around 44,986 traders engaged with their program. This growth reflects the allure of trading with significant buying power.

Each trader, spending an average of 4 months in the middle “100K” program at $99 per month, and likely resetting their account at least twice (at the same cost), faced significant expenses. These fees, often overlooked, add up quickly.

Our calculations estimate Topstep's revenue during this period at around $26.72 million, combining subscription and reset fees. In contrast, even with a generous assumption that half of the $16 million paid out since 2020 was distributed in the first half of 2023, the payouts to traders would be around $8 million.

This stark contrast between Topstep’s revenue and trader payouts paints a clear picture: while Topstep generates significant income, the average trader sees a modest payout, often less than what they invest in fees.

Disclaimer: Obviously a lot of these figures are estimates based on what's mentioned on their website. (although I believe them to likely be conservative). 

The economics of trading with a firm like Topstep reveal the challenges and financial dynamics at play. 

These firms don’t want you to win and make the VAST majority of their money from people failing. Fundamentally their model is NOT in your best interest. 

Now this isn’t just Topstep, this is the model for nearly EVERY single prop trading firm out there. 

Traders, often attracted by the potential of high leverage and substantial buying power, find themselves in a model where the odds are not necessarily in their favor. This analysis suggests a careful consideration of costs versus potential earnings when engaging with prop trading firms.

The allure of prop trading firms like Topstep often masks the harsh realities: stringent rules, challenging profit targets, and a model that seems more beneficial to the firm than the trader.

 In contrast, trading a small personal account, though less glamorous, offers more control, realistic goals, and a sustainable path to trading success. This analysis suggests that traders might be better served by building their skills and capital independently, rather than relying on a prop trading firm's high-risk, high-pressure environment.

Regards,

Alex Butterfield
Founder & CEO, TraderEdge

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