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This week For Traders became the first prop firm to launch a prediction markets prop trading offering.
Partly this is a clever idea as it gives people in the UK and Europe access to the product, which is otherwise off limits to them. In that sense, it’s similar to what Kraken is doing with Breakout, which gives UK customers access to crypto derivatives.
But it’s also a fun way of expanding the prop product and generating a new source of revenue for the industry.
Interestingly, IQ Option’s owner Quadcode – which also owns part of Polymarket – invested in the owner of major prop tech provider FPFX this week as well. So maybe we’ll see this become more of a trend in the near future.
More interesting is how this offering is actually being structured. It is already hard to hedge CFDs and futures props. I have to imagine it’s going to be much harder for prediction markets, particularly if you let people bet…I mean trade on things like ‘will aliens appear in the US this year’ or ‘Will Clavicular be Iran’s next Supreme Leader by March 31st?’
For Traders’ set up is primarily designed to prevent people making massive lucky bets on unlikely events to quickly hit profit targets, or making tiny returns on extremely likely outcomes to grind it out until they get a payout.
The prop firm has done this by preventing users from trading on event contracts with odds outside the $0.20 – $0.80 range.The key rules are:
| For Traders Prediction Markets Rules | |
|---|---|
| Trading restrictions | Contracts must trade from $0.20 to $0.80 |
| Minimum trades | 10 |
| Max risk | 1% |
| Max daily drawdown | 5% |
| Max drawdown | 8% |
| Profit target | 4% |
| Profit split | 90% |
| Max open trades | 2 |
What is another positive of this model?
Because event contracts are a fixed odds product, it means that – as a prop – you at least have some idea of what your potential payouts will be.
For example, with 1% risk on a $100k account, the most a customer can make from a single trade is a $4,000 profit.
This is obviously why the minimum trade requirements is there, as that prevents someone from doing a YOLO on a $0.20 contract, hitting the 4% return target immediately, and then getting a $3,600 payout.
These are basically the key behaviours the rules create…
- You can’t trade in large enough size to get a massive payout and your max payout from a single trade is known (max risk rule).
- You can’t do YOLOs or a slow grind to the profit target (limiting traders to $0.20 – $0.80 contracts).
- You would have to be very, very lucky to fluke a payout from gambling (minimum 10 trades).
This offering is currently in Beta testing and one area I can see changing is the drawdown limits. Given you can only risk 1% of the account balance on a trade and these are fully collateralised products, even if you lost everything in that trade (unlikely) you would only get a drawdown of 1%.
It also might be the case that they only let people trade financial products because the outcomes are harder to predict, although that could easily mean losing quite a lot of business as well, given sports are the most popular contracts.
A more tenuous – but very prop-y – decision could be to have some kind of rule where you have to trade within an average range of your opening trade. That’s the sort of thing you can add if you need to start battening down the hatches.
Of course these are just my suppositions. Fortunately for you, dear reader, soon you won’t have to rely on conjecture. As noted, this product is in testing mode and the participants don’t get any payouts if they ‘win’. All you have to do is look at what the rules are now and how For Traders changes them when they shift this to a real product.
Will there be changes? Currently the top trader on the platform has a profit of $30.1m, so it’s safe to assume that people have already found a way to game the system. And if there’s a way to game the system, you have to change the rules.
