In a recent exclusive report, several news portals highlighted the European Securities and Markets Authority’s (ESMA) ongoing discussions regarding the regulation of prop trading. The Czech National Bank has emerged as the first EU regulator to comment on this sector, acknowledging the need for potential new regulations.
The Czech National Bank clarified that various business models prop trading firms use might fall under the MiFID regulatory framework. The services under scrutiny include the reception and transmission of orders, execution of orders on behalf of clients, and dealing on own account. The regulator emphasized that while some prop trading firms might be subject to MiFID, others might qualify for exemptions. In cases of suspected fraud, criminal law would apply.
This response from the Czech National Bank came in light of ESMA’s preliminary investigations and discussions on regulating prop trading firms. Despite this, no top regulators have officially confirmed any regulatory actions, making the Czech National Bank’s statement a pioneering move within the EU.
Please check my comment that I made in my FxIgor youtube video:
Diverse Opinions on Prop Trading Regulations
Industry experts and stakeholders hold varied views on the need for prop trading regulations. Greg Rubin of Axi Select believes prop firms should adhere to the same regulations as FX/CFD brokers, as both serve retail traders aiming for profit. Conversely, Matus Tutko of FTMO argues that specific regulations are unnecessary, given the robust existing rules, including consumer protection and data protection laws. Tutko supports self-regulation, which he believes would enhance client trust.
Axi’s Rubin highlights the similarity between prop trading and the standard FX/CFD industry, noting that the primary reason for the lack of regulation is the technicality of using demo accounts. Leverate’s CEO, Ran Strauss, shares this perspective, expecting prop firms to eventually meet the same standards of regulation and transparency as CFD brokers.
Potential Regulatory Approaches
Evdokia Pitsillidou from SALVUS Funds suggests a mixed approach to regulating prop trading. She proposes strengthening the existing regulatory framework for financial services firms to accommodate prop trading activities while introducing new regulations explicitly tailored to the unique characteristics of prop trading.
Eden Lang and Ariel Yosefi of Herzog Law support leveraging the established regulatory infrastructure tailored to address the unique risks of prop trading. They emphasize that this approach should include softening licensing and minimum capital requirements to suit the specific nature of prop trading firms.
Issues of Transparency and Trust
Prop trading firms often operate in a simulated environment, which poses challenges to transparency and trust. Devexperts’ CEO, Evgeny Sorokin, points out that the rules determining the success or failure of trading challenges can be manipulated, benefiting the firm financially. He suggests that regulators could focus on transparency around the challenge’s success rates, akin to the requirements for retail FX and CFD brokers to display the percentage of losing clients.
Another significant issue is payout challenges. Firms like The Funded Trader and Skilled Funded Traders have faced customer complaints regarding delayed or stopped payouts. Sorokin proposes segregating payout funds from the rest of the business to safeguard traders’ interests.
Quinn Perrott of TRAction recommends appropriateness testing and full disclosure of account structures to enhance transparency. He also emphasizes the importance of transparent pricing information for clients.
Future of Prop Trading
Despite the controversies, prop trading is gaining popularity. Several retail brokers, including OANDA, Axi, IC Markets, and Hantec Markets, have entered the prop trading space, with more expected to follow. Devexperts’ CEO believes that the entry of traditional retail brokers, who are already regulated, will benefit the industry by ensuring compliance and trust.
Justin Hertzberg of FPFX Tech supports this view, noting that brokers are well-positioned to run prop trading firms due to their existing infrastructure and regulatory compliance. FTMO, a prominent prop trading firm, is also preparing to launch brokerage services, indicating a trend toward integration within the industry.
Conclusion
Prop trading offers a unique business model, combining firm capital with profit-sharing arrangements while limiting traders’ risk. Appropriate regulation is crucial for the industry to thrive. Leverate’s Strauss believes that while prop trading has significant growth potential, it must be regulated to ensure long-term success. The evolving regulatory landscape will play a pivotal role in shaping the future of prop trading.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
Related posts:
- Best 42 Forex Prop Firms in 2024! – Ranked List of All Forex Prop Firms!
- How to Avoid Instant Funding Prop Firms Trap?
- Top 7 Instant Funding Prop Firms – Best Funded Forex Accounts Without Evaluation!
- How Teen Trader Jesse Turned $3k into $750k Using Prop Firms – Forex Secrets Unveiled!
- Prop Firm Alpha Capital Bans 150 Traders Due to Group Trading Allegations
- How to Start Forex Prop Firm?
- All Ranked Forex Prop Companies in 2024!
- The Cheapest Instant Funding Prop Firm!
- Risk Management Strategy When You Trade for Prop Company!
- What Lot Size Should I Trade When I Trade For a Prop Company?
- Best Brokerage Firm in Pakistan! – Top 10 Brokerage Firms in Pakistan
- How I Use The Dollar Index (DXY) To Increase Trading Profits? – Useful Live DXY Trading Example!
