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The way that a funded trader company is supposed to work is that someone pays to take a trading challenge. If they pass that challenge then they are given a ‘real’ money account to trade with and any profits they generate are split with the funded trader firm.
However, even if they do get a funded account, then the trader – in most instances – continues to trade on a demo account. Those trades are then mirrored with real funds by an account managed by the funded trader firm. Or at least that’s what should happen in theory.
In practice this poses some difficulties. Firstly, the short time frame that a ‘funded’ trader has been with you means it is very hard to know whether or not the person was lucky or actually knows what they are doing. Imagine someone showing you a fund factsheet and hyping their Sharpe ratio and then you see it’s only one quarter’s worth of performance. Copying this person means that you can end up mirroring the trades of someone who blows up their account.
Another factor is that there is no netting off taking place. For example, let’s say you run a broker and have clients trading indices or FX. The odds are a lot of that flow will offset itself because clients don’t tend to skew massively in one direction.
Speak to TRAction and make sure your broker is ready for EMIR Refit
With a prop this dynamic doesn’t exist. No one is putting margin down because you are supposed to be the one providing it by funding their account. You could do some kind of pure ‘STP’ model and offload everything but that would probably be (1) expensive and (2) also risky for the reason outlined above. It does seem like some props may be doing something akin to this though and we understand that iSAM and Saxo Bank are acting as LPs to at least one funded trader company.
Anyway, along with margin problems that are a whole other rabbit hole, the basic problem is that props have fake trade flow but real liabilities. They have to manage something akin to a risk book but without their clients putting down margin.
This is, as Trading Pit Founder Illimar Mattus told me not so long ago, not an easy thing to do! And in that same conversation, he made the point that a lot of people who have started these companies are going to drop off because they don’t know what they’re doing.
So what are they doing? Well, many of them are just taking the money they have made from people paying for challenges and then use that to pay out any ‘winners’ who they have given a funded account to.
As you can imagine, this creates risks. To illustrate this we can look at a firm called E8 Markets. On their website they claim that between 2022 and 2023 they went from 100k clients to 200k clients. Incidentally, if all of those 200,000 clients were equally split between the challenges E8 Markets currently offers, it would suggest they’ve made in excess of $50m in about two years.
Interestingly, E8 Markets also lists their challenge pass rate on their website. They claim that just north of 17% of clients passed the challenge in the first quarter of this year. If we assume that figure is relatively consistent then it would mean somewhere in the region of 17,000 people got a ‘funded’ account with E8 Markets in the roughly 12 month period it took them to go from 100k to 200k clients.
ATFX is on a hiring spree – read about it here.
However, it’s important to note that someone who passes a challenge does not automatically make money. I have heard various stats on this but if we apply the general one that 80% of clients lose money, like with a broker, this would still mean E8 Markets had 3,400 profitable clients in that period. This is not a lot – 3.4% of the original 100,000 – but it is also not nothing.
If you assume all those people were split between the different accounts E8 offers (1) evenly and (2) the average profit was 5% (I know this may be way too high), then the payouts would be $3.23m. E8’s official ‘pay out’ figures would suggest the figure was over $20m but who knows how accurate those are.
Readers may have noticed the phrase ‘if you assume’ was used several times above and, like all assumptions, these ones may be completely wrong. But the point I’m trying to make is that, even with the odds stacked in your favour as a funded trader firm, you can end up with sizable liabilities stemming from the people who trade profitably with you. This also doesn’t factor in technology, staff, legal, and marketing costs.
Anecdotally, if I go on Facebook at the moment, every single ad is for a funded trader company. In fact, just after writing the previous sentence, I went and checked again and got five ads from FTMO, FXIFY, Funded Trader Pro, Rebel Funding, and – of course – OnlyFunds.
The point here is that marketing is presumably becoming pricier and, with competition becoming fiercer, it also puts price pressure on firms. The result is that firms have to (1) spend more to attract a client and (2) are incentivised to offer that client a deal where they pay less.
Tech costs are also very pricey from what I understand. Some providers, just for the CRM, take something like 25% of your revenues.
To put this all in the sort of low IQ terms that my brain can understand at the end of a long bank holiday weekend, it means that the funded trader business model, assuming they don’t place any real trades, works something like this…
Money in
- People paying for challenges
Money out
- Marketing
- Technology
- Legal
- Staff and office
- Any other operational costs
- Paying successful traders
If ‘money in’ is less than the ‘money out’ then you have a big problem!
And indeed in the last couple of months we’ve seen SurgeTrader, True Forex Funds, and Skilled Funded Traders all shut down, most likely because they suffered from the fatal problem of ‘money in’ being less than ‘money out’.
Who is next? One of the things that seems to be a warning sign is payouts stopping and then yuuuuge discounts being offered. What probably happens here is that the people running a prop suddenly have a horrible realisation; they see that ‘money in’ is less than ‘money out’. So they stop ‘money out’ by blocking payouts and then try to increase ‘money in’ by making their offering super cheap – kind of like Mike Ashley does with Sports Direct.
“Discounts are not inherently bad or a red flag,” James Glyde, the Founder of funded trader firm Pip Farm told TradeInformer. “But certainly firms have done big discounts before closing shop. If you look at one of the firms which recently shut shop, they were doing huge promos just a week before, when it must have been crystal clear they had financial problems.”
Do any firms fit this description at the moment?
Well, one company called Apex Trader Funding currently has a 90% discount on all of its offerings and I have seen several complaints, including one from former Coffee Break interviewee Ignas Bakanauskas, that there are no payouts. Maybe it’s nothing. Maybe it’s one to watch.