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We’ve written here quite a few times about prop firms or funded trader programmes. The latter is the more appropriate phrase but the former seems to have stuck. What can you do?
To refresh your memory, these work a lot like mass scale futures arcades. A client pays to take a ‘challenge’ which is undertaken on a demo account. If they hit all the targets set out by that challenge, they are given a real money, large size account to trade with.
The real money component is usually structured such that the trader continues to use a demo account. Any trades they place are then copied by a real money account operated by the funded trader firm. Profits generated by those trades are then split between the company and the trader.
We wrote a couple of weeks ago about MetaQuotes warning one major player in this nascent industry that it should no longer accept US clients. That seems to have now played out across the board and companies are rapidly shutting down access to US clients.
Funded trader companies are being set up in a couple of ways. A small number have their own license with MetaQuotes. But a lot more are doing what is typically described as grey labelling. This is where a broker or prop firm markets and sells to clients, but the actual platform those end clients trade with is operated by another firm, with that firm’s branding and credentials still on it.
This creates a couple of problems. One is that it means MetaQuotes has little oversight of who is using their software. The other is that contracts with MetaQuotes are typically structured in such a way that demo accounts do not incur fees, only live accounts do.
The result is that MetaQuotes is taking on companies that want to engage in regulatory grey area business in the US but it then doesn’t receive any meaningful revenue from them. It’s like selling a call option where you don’t even get to keep the premium.
The other risk that we understand exists is the extremely poor internal controls that a large number of funded trader companies have. Almost all of them are offering a CFD product. This means that when they actually have to take on ‘real’ trades from people that pass the challenge, the set up is effectively the same as a standard retail broker.
However, they offer very high leverage but no LPs will take them on as clients. As a result, we understand that several funded trader companies are actually booking huge volumes but can’t hedge out. The result is that they have to b-book everything. Again, this is not a good idea anywhere but it is definitely not a good idea in the US.
So to think of this from MetaQuotes’ point of view, there are companies using their software that are generating large numbers of complaints in the US. These businesses often have questionable operational standards that could makes things even worse if US authorities look into them. And then they as a company are making almost nothing from it.
We’ve looked at MetaQuotes a few times in the past and questioned the logic of some of their policies for onboarding brokers. A lack of clarity and consistency has understandably irked a lot of people in the industry.
In this instance, it seems easier to understand. They are getting no upside but face huge downside risk. We understand one US regulator has even put pressure of them to block US clients, threatening them with removal from the app store if they don’t comply.
So it’s probably fair enough that they went into terminator mode last week and basically told a bunch of funded trader companies and the brokers doing grey label agreements with them that they would get switched off – brokerages included – unless they stopped taking US clients and cleaned up in other areas.
What next? As followers of the TradeInformer WhatsApp channel will have seen, a lot of these funded trader guys seem like crypto people. They don’t know what they’re doing but think they are high IQ geniuses, so take on huge risks as a result. I would not be surprised if more of these guys get toasted like MyForexFunds did last year.
On the platform side, it is interesting to see more and more players on the tech side coming to market with alternative products for this business model. Match-Trade, for example, launched a prop product last week. Devexperts launched theirs a while ago as well. Who knows? Maybe it’s something MetaQuotes will miss out on.
Regardless, the point remains that this industry is already huge. I would estimate there are upwards of 300 companies running this business model at the moment.
FPFX ends Funded Engineer
Another component of the funded trader industry is that a lot of the non-trading platform tech, like the CRM, challenge creations, and other parts of the front end, are developed by third-party companies. PropTradeTech is one. Another is FPFX. And there was more drama last week when the latter company completely shut down a prop firm called Funded Engineer.
The CEO of Funded Engineer calls himself Trader T. He has what looks like an AI-generated image of a bull as his picture on the company website. The company seems to be based in Dubai but it’s not entirely clear. Trader T posts a lot on Twitter and has interactions like this…
I don’t know….if I told you this person ran a company that had tried to swindle someone else out of some dosh, would you be that surprised?
FPFX said it shut down Funded Engineer due to accounting fraud and KYC/AML failures.
Like other technology providers in this sector, FPFX operates on a revenue share model. The benefit of this is that you get very fast and cheap set up. The downside is that you have to share your profits with FPFX in perpetuity.
To use another option analogy, from FPFX’s point of view, they pay very little to set a company up but have high earning potential if the company does well. If not, then they lose very little. Call option-esque.
The revenue share agreement works based on what FPFX calls ‘net sales’.
The basic calculation for this is something like…
(Challenges + trader profits) – (trader payouts + trading costs) = net sales
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What Funded Engineer did was to create fake accounts on its own platform. Given Trader T is a highly skilled trader, you would expect these accounts to be absolutely smashing it.
Shockingly, however, FPFX claims Funded Engineer executives were opening fake accounts and placing random trades to pass the tests. If they passed a challenge, they’d continue the process until they were ‘profitable’. If an account failed they’d just delete it.
Using this highly advanced process they were able to inflate the amount they had to pay out to traders by $2m. FPFX claims it checked the accounts in question and no KYC was used to approve them, nor was any cash transfer ever made to them.
Why would this work? If you go back to the sum above, it would artificially increase the trader pay out component, meaning there would be a commensurate drop in the net sales figure. That would mean Funded Engineer would have to pay out less to FPFX.
Bro let me show you the dark side…