Belgium’s Financial Services and Markets Authority (FSMA) today issued a warning regarding the risks associated with the activities of so-called prop trading firms.
The latter are parties that trade for their own account and offer consumers the opportunity to play a shadow investment game, a practice that costs money and can lead to reckless behaviour.
Prop trading (short for proprietary trading) firms make it possible for consumers to trade in financial products such as shares, bonds, commodities, cryptocurrencies, CFDs and forex products without having to use their own money to do so.
Before consumers are allowed to trade in financial products for a prop trading firm, they have to meet a series of challenges. These courses are not easy, not cheap and often consumers have to take, and pay for, several of them before they can successfully complete them. There is a good chance that some consumers never pass the courses. This is how prop trading firms earn money from them.
A consumer who has successfully completed the challenges receives a ‘certificate’ – a diploma that the firm itself issues – and can begin trading. This involves playing a game of shadow investment. The consumer never makes any actual trades. He or she plays on a demo account with the prop trading firm. The latter may decide to carry out one or more demo transactions for a consumer on an actual trading platform. If such a copied transaction does prove profitable, then the consumer gets a commission.
However, the prop trading firm alone decides under what conditions consumers may use their platform, and what simulated transactions it will copy. It is therefore difficult for a consumer to determine whether he or she is entitled to any commissions and if so, how much. A consumer may thus spend a lot of time and energy without any recompense.
The FSMA is receiving ever more questions about such firms. It has been observing an increase in advertisements for prop trading firms on social media. Various websites are also popping up that offer paid courses to help consumers succeed in the prop trading firms’ “challenges”.
The firms encourage trading in complex financial instruments, such as CFDs and forex-products. These products are highly risky, and consumers often lose their entire investment. This tendency concerns the FSMA.
The FSMA therefore warns the public against the activities of such prop trading firms. It also warns against the ecosystem of any firm that ride on the coattails of the popularity of prop trading firms. They offer services linked to the latter’s activities, such as courses or trading software used for training.
The regulator emphasizes that prop trading companies do not hold any authorization and therefore are not allowed to provide investment services. The same is true for prop traders. The definition of the latter is consumers who have successfully completed a course.
Many studies have shown that the gaming element in prop trading can lead to overconfidence and recklessness among users, both in shadow investment and in actual transactions in which they use their own money.
