The popularity of the prop trading industry has exploded in the last few years. Although the concept is not new, aggressive advertising and many new entries into the market have created a new trend. The panel discussion on the topic “Navigating Prop Trading: Today & Tomorrow” at iFX EXPO International 2023 explored many demands, trends, and necessities around prop trading.
Prop trading firms operate within the retail trading industry, but they are not brokers. They remain unregulated, raising the concerns of fraud. Despite tall promises, many prop trading firms delay or reject payouts. And, the US regulator’s fraud charges against My Forex Funds exposed the industry.
Many experts within the trading and even prop trading industry agree on the necessity of regulating this sector. However, questions remains: how?
Regulations Are Necessary
“The regulation on Prop trading shouldn’t be as harsh as it is right now with FX and CFDs,” Andrew Mreana, the Head of Growth at Spotware Systems, said.
Andrew Mreana, Head of Growth at Spotware Systems
“But show me the proof that you do have the ability to run a fund, meaning you have the money behind you. Make it public, make it transparent – this is our pot; this is how much this company can afford to release to the market. Then show the proof that you have at least a couple of professionals running it with a background in investments.”
Adding to the partnership of prop trading firms, he stated: “Try and attach it a bit to the FX and CFDs firms. Don’t make them use a different name. Let them run it under the same entity. It doesn’t mean they cannot treat it even if the regulation is missing a bit now; it doesn’t mean they cannot treat it as proper.”
“You know FX CFDs MiFR reporting, so monitor everything that you get ready for that moment when if anyone knocks at your door, you’re ready.”
However, none of the regulators directly speak on the prop trading industry yet. While Mreana believes that “it’s going to take another 6, 12, 18 months until we’re going to start seeing some form of regulation.”
However, FTMO’s CEO, Otakar Suffner, does not see any regulations on prop firms in the near future. “It’s going to take longer than 6 to 12 months because you have so many regulators they don’t understand our business because it is quite new,” Suffner mentioned.
Otakar Suffner, Co-founder and CEO at FTMO
“Even though FTMO has been here for ten years, it has been getting attention for the past three years. We have been in discussions with the regulators for several years now, and honestly, I don’t know if any regulation is coming.”
Regulations bring many restrictions on companies. However, reputed brands still support regulations.
“When you want to set up something for the long term, and you want to set up a company that actually has some values and wants to sustain, not just a boom to make some quick money. Then not having regulation in place is actually hurting,” said the Head of Customer Support at The Trading Pit, Andreas Pilavakis.
“You can see all these companies popping up overnight with these crazy offerings. I saw something the other day: sign up and get a 200 percent refund of what you initially deposited. It doesn’t make sense. It’s a hook.”
David Kimberley, Founder of CFDs Weekly
Commenting on desired regulations, Pilavakis pointed out: “We’d like to see from the regulator side some guidelines specifically tailored towards prop trading firms, such as what you can say, what you can’t say, what you have to show on your website, what you don’t have to show just because traders tend to invest in a company that they can trust and if you’re not regulated then traders have in the back of their heads, that maybe they shouldn’t waste their time and money with you.”
“If you have a certification from the regulator, then traders will trust you more.”
David Kimberley, the Founder of CFDs Weekly commented: “There are a lot of people who seem to assume that because something is unregulated you can just commit fraud and well you can. See what happened with My Forex Funds. They were shuttered for committing fraud. It’s not like they breached some regulations, they just lied about what they were doing.”
“On the regulatory side it’s it seems like it’s very difficult to design something right because there are two components to a prop trading business. The challenge side is relatively straightforward but the second component in terms of how you structure that is quite different. I think if regulation comes, it might be around that particular point and maybe you have to prove that you’re running a fund and have some rules about how you’re contracting with the person trading for you.”
Why Are Prop Trading Firms So Popular?
Regarding services, prop trading firms have a clear advantage over brokers: they offer traders access to more capital with less initial funds required.
Andreas Pilavakis, Head of Customer Support at The Trading Pit
Pilavakis explained: “If you had like $200 and you went to a brokerage and opened an account to make that initial investment worth it, you’d have to take huge amounts of risk right because no one’s going to walk away with a 10 percent return on a $200 account. So what the prop trading space is offering right now is for the same $200; let’s say if you come through – we offer a 20K demo account, which you have to go through the valuation stage first to prove that you’ve got what takes and you’ve got a good strategy in place. So we ask for 10 percent, and then after that, you get into the earning account where for the next 10%, you get paid out your profit share.”
“And if you multiply the numbers with a 20K account and you make 10 percent, that is 2K. So split that into 70:30, which is the profit share we give, then you walk away with 1.4k, rather than the $20 you walk away with if you had your $200 in a brokerage.”
According to Mreana from Spotware, prop trading is a new product and has been advertised more.
“Prop trading has existed for the last 30 years 40 years. It was big in the US. Big companies allowed it; they wanted to share an opportunity with traders, and now it’s getting a lot of attention,” he added. “We all know the risk when you’re trading CFDs as a trader is old-fashioned or the standard way, let’s say, it involves a lot of money. So, the risk factor with prop trading is much lower, and the reward is bigger. Because you’re trading the company’s funds as long as that company can prove that it has the funds to fund you.”
However, the entry barrier to access the funds offered by prop trading platforms remains high.
“Trading is immensely difficult,” said the CEO of FTMO, revealing that 90 percent of the traders don’t successfully pass the evaluation process of prop trading firms.
A ‘Fragile’ Industry
FTMO’s CEO and Spotware Systems’ Head of Growth called the prop trading industry “very fragile.”
“It’s a very fragile industry because there is no guidelines or regulation to which shall you follow currently,” Suffner said, adding: “Try to do your best with advertisements and don’t mislead the clients because everyone can be affected. It is a very fragile industry when it comes to banks, payment providers, platform providers, and so on.”
Mreana added: “It’s a very fragile industry; it might blow up; it might implode.”
“From my point of view, I would like to see brokerages taking action, brokerages, already existing CFDs brokers offering an extra service like they provide copy trading, MAMs, and PAMMs. Why not prop trading, then?”
“Then it’s the broker’s money, it’s public. We all know with new companies, it’s challenging to do due diligence; it’s difficult to know exactly if that company has the funds. Because at the end of the day, it all comes to the company funding the client and getting some results.”
Spotware Systems offers a well-known trading platform to brokers, called cTrader. While trading platform providers do not need to be regulated as they do not provide direct services to clients, they also face a lot of non-regulatory policing.
Last year, Apple delisted Metaquotes’ MetaTrader platforms from its AppStore. Although the tech giant did not explain its move, many reports suggested it was because of many fraudsters using the MetaTrader platforms.
“We are still on the App Store. We like being on the App Store. We are going to be there for a very long time,” said Mreana.
He added: “Although we welcome prop trading firms, we are being very selective. We have a strong KYC process. So if they qualify, then by all means, why not? Business is business. But at the same time, we’re trying to protect the company’s reputation and the people, the average person that wants to trade. “
The popularity of the prop trading industry has exploded in the last few years. Although the concept is not new, aggressive advertising and many new entries into the market have created a new trend. The panel discussion on the topic “Navigating Prop Trading: Today & Tomorrow” at iFX EXPO International 2023 explored many demands, trends, and necessities around prop trading.
Prop trading firms operate within the retail trading industry, but they are not brokers. They remain unregulated, raising the concerns of fraud. Despite tall promises, many prop trading firms delay or reject payouts. And, the US regulator’s fraud charges against My Forex Funds exposed the industry.
Many experts within the trading and even prop trading industry agree on the necessity of regulating this sector. However, questions remains: how?
Regulations Are Necessary
“The regulation on Prop trading shouldn’t be as harsh as it is right now with FX and CFDs,” Andrew Mreana, the Head of Growth at Spotware Systems, said.
Andrew Mreana, Head of Growth at Spotware Systems
“But show me the proof that you do have the ability to run a fund, meaning you have the money behind you. Make it public, make it transparent – this is our pot; this is how much this company can afford to release to the market. Then show the proof that you have at least a couple of professionals running it with a background in investments.”
Adding to the partnership of prop trading firms, he stated: “Try and attach it a bit to the FX and CFDs firms. Don’t make them use a different name. Let them run it under the same entity. It doesn’t mean they cannot treat it even if the regulation is missing a bit now; it doesn’t mean they cannot treat it as proper.”
“You know FX CFDs MiFR reporting, so monitor everything that you get ready for that moment when if anyone knocks at your door, you’re ready.”
However, none of the regulators directly speak on the prop trading industry yet. While Mreana believes that “it’s going to take another 6, 12, 18 months until we’re going to start seeing some form of regulation.”
However, FTMO’s CEO, Otakar Suffner, does not see any regulations on prop firms in the near future. “It’s going to take longer than 6 to 12 months because you have so many regulators they don’t understand our business because it is quite new,” Suffner mentioned.
Otakar Suffner, Co-founder and CEO at FTMO
“Even though FTMO has been here for ten years, it has been getting attention for the past three years. We have been in discussions with the regulators for several years now, and honestly, I don’t know if any regulation is coming.”
Regulations bring many restrictions on companies. However, reputed brands still support regulations.
“When you want to set up something for the long term, and you want to set up a company that actually has some values and wants to sustain, not just a boom to make some quick money. Then not having regulation in place is actually hurting,” said the Head of Customer Support at The Trading Pit, Andreas Pilavakis.
“You can see all these companies popping up overnight with these crazy offerings. I saw something the other day: sign up and get a 200 percent refund of what you initially deposited. It doesn’t make sense. It’s a hook.”
David Kimberley, Founder of CFDs Weekly
Commenting on desired regulations, Pilavakis pointed out: “We’d like to see from the regulator side some guidelines specifically tailored towards prop trading firms, such as what you can say, what you can’t say, what you have to show on your website, what you don’t have to show just because traders tend to invest in a company that they can trust and if you’re not regulated then traders have in the back of their heads, that maybe they shouldn’t waste their time and money with you.”
“If you have a certification from the regulator, then traders will trust you more.”
David Kimberley, the Founder of CFDs Weekly commented: “There are a lot of people who seem to assume that because something is unregulated you can just commit fraud and well you can. See what happened with My Forex Funds. They were shuttered for committing fraud. It’s not like they breached some regulations, they just lied about what they were doing.”
“On the regulatory side it’s it seems like it’s very difficult to design something right because there are two components to a prop trading business. The challenge side is relatively straightforward but the second component in terms of how you structure that is quite different. I think if regulation comes, it might be around that particular point and maybe you have to prove that you’re running a fund and have some rules about how you’re contracting with the person trading for you.”
Why Are Prop Trading Firms So Popular?
Regarding services, prop trading firms have a clear advantage over brokers: they offer traders access to more capital with less initial funds required.
Andreas Pilavakis, Head of Customer Support at The Trading Pit
Pilavakis explained: “If you had like $200 and you went to a brokerage and opened an account to make that initial investment worth it, you’d have to take huge amounts of risk right because no one’s going to walk away with a 10 percent return on a $200 account. So what the prop trading space is offering right now is for the same $200; let’s say if you come through – we offer a 20K demo account, which you have to go through the valuation stage first to prove that you’ve got what takes and you’ve got a good strategy in place. So we ask for 10 percent, and then after that, you get into the earning account where for the next 10%, you get paid out your profit share.”
“And if you multiply the numbers with a 20K account and you make 10 percent, that is 2K. So split that into 70:30, which is the profit share we give, then you walk away with 1.4k, rather than the $20 you walk away with if you had your $200 in a brokerage.”
According to Mreana from Spotware, prop trading is a new product and has been advertised more.
“Prop trading has existed for the last 30 years 40 years. It was big in the US. Big companies allowed it; they wanted to share an opportunity with traders, and now it’s getting a lot of attention,” he added. “We all know the risk when you’re trading CFDs as a trader is old-fashioned or the standard way, let’s say, it involves a lot of money. So, the risk factor with prop trading is much lower, and the reward is bigger. Because you’re trading the company’s funds as long as that company can prove that it has the funds to fund you.”
However, the entry barrier to access the funds offered by prop trading platforms remains high.
“Trading is immensely difficult,” said the CEO of FTMO, revealing that 90 percent of the traders don’t successfully pass the evaluation process of prop trading firms.
A ‘Fragile’ Industry
FTMO’s CEO and Spotware Systems’ Head of Growth called the prop trading industry “very fragile.”
“It’s a very fragile industry because there is no guidelines or regulation to which shall you follow currently,” Suffner said, adding: “Try to do your best with advertisements and don’t mislead the clients because everyone can be affected. It is a very fragile industry when it comes to banks, payment providers, platform providers, and so on.”
Mreana added: “It’s a very fragile industry; it might blow up; it might implode.”
“From my point of view, I would like to see brokerages taking action, brokerages, already existing CFDs brokers offering an extra service like they provide copy trading, MAMs, and PAMMs. Why not prop trading, then?”
“Then it’s the broker’s money, it’s public. We all know with new companies, it’s challenging to do due diligence; it’s difficult to know exactly if that company has the funds. Because at the end of the day, it all comes to the company funding the client and getting some results.”
Spotware Systems offers a well-known trading platform to brokers, called cTrader. While trading platform providers do not need to be regulated as they do not provide direct services to clients, they also face a lot of non-regulatory policing.
Last year, Apple delisted Metaquotes’ MetaTrader platforms from its AppStore. Although the tech giant did not explain its move, many reports suggested it was because of many fraudsters using the MetaTrader platforms.
“We are still on the App Store. We like being on the App Store. We are going to be there for a very long time,” said Mreana.
He added: “Although we welcome prop trading firms, we are being very selective. We have a strong KYC process. So if they qualify, then by all means, why not? Business is business. But at the same time, we’re trying to protect the company’s reputation and the people, the average person that wants to trade. “