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TradeInformer understands that broker IC Markets has been in talks to launch a prop trading business. It is unclear whether the company will actually launch the product, but the firm has been in talks with FPFX to do so.
FPFX, which is operated by Forest Park FX executive Justin Hertzberg, has emerged as a major provider in the prop space. The company, which recently announced a deal with technology company Match-Trader, has provided at least 100 companies with the tech needed to set up.
We have looked at prop firms briefly before, but the basic model is somewhat similar to futures arcades of the past. People pay to take a ‘challenge’ on a demo account. If they are successful, then they are allocated capital to trade with and then do a profit split with the company. The more successful they are, the larger their allocation becomes and vice versa.
On an anecdotal level, this author is seeing a significant amount of interest in the number of people wanting to start these companies, even if they aren’t of the same size as IC Markets. This is primarily because the costs are low and the regulatory burden appears to be almost non-existent.
Some brokers, notably Axi, have launched a prop offering, while others, like Monaxa or IC Markets, appear to be in the process of doing so. It should be noted that the set up costs for props are so low that this author believes many IBs and affiliates are also driving this trend – why do a revenue split with a broker if you can capture it all yourself?
Given how challenging some of these challenges are, it seems that many people in the CFD world are skeptical as to how successful these firms can be long-term. Binary options 2.0 is the phrase one hears muttered from time to time.
The thing is, and as discussed on one of our recent podcast episodes with TRAction Fintech’s Quinn Perrott, binary options were not an inherently ‘bad’ product. It’s just that all the people who used them to commit fraud can turn around and go ‘ah those binary options, they really are terrible, aren’t they?’ and then move on to some other thing like crypto.
In the same way, the prop space is clearly open to manipulation but that does not mean that the product is an inherently bad one. And having previously been as skeptical as many readers, I am less skeptical than I once was for various reasons that will be discussed another time.
The other interesting thing to consider is how this would actually be restricted. If you look at binary options or even CFDs, the ESMA restrictions were comparatively easy to impose because (1) they are treated as securities and (2) ESMA has a framework by which it can quickly restrict how securities are marketed, sold, and so on.
In contrast, props are not offering securities. The first component is all done on a demo account, so how do you regulate that?
The second component is more interesting. As we noted when looking at MyForexFunds, some props appear to be basically making you pay to ‘skip’ the challenge and go straight to trading real money…except the money you get in your account is the same that you pay to access this account, which is as dumb as it sounds and is probably why MFF got shut down.
However, the more interesting way of doing this is that a person that successfully passes a challenge continues to trade on a demo account. The difference is that their trades then create a signal which is copied by a real money account operated by the provider. This seems more financial services-y than the challenge component but still difficult to regulate in a meaningful way.
Turkish gold bazaar
Last week we jokingly suggested that someone hocking you goods at a market stall in Istanbul probably wouldn’t know what the FCA was, let alone care about whether or not the broker they punt with is actually regulated by them.
However, one reader tells us that the gold dealers at the Grand Bazaar in Istanbul actually do really care about being regulated by the FCA. In fact, not only do they want you to be regulated by the FCA, but even CySEC is apparently not acceptable to them.
Moreover, the gold dealers also like to know who their LP is and who is the ultimate owner of the broker they’re dealing with. Said reader even claimed an FCA-regulated broker with the wrong owners would not be up to scratch for the grand bazaar. Go figure.
As an aside, we are always interested in hearing stories about the Grand Bazaar, a place we believe we may be responsible for dealing some major blows to brokers over the course of 2023 and which seems to be one of the favourite sources of rumours for executives in this industry. Send them our way.
