We had a whole amazing article planned for this week. Sadly the people who run My Forex Funds decided to be dumb and get shut down by the CFTC, so we’ll be looking at that instead.
Next week we’ll be looking at the prop trading model (along with the article that was meant to be for this week) in more detail.
For now, just think of this as a business that’s similar to an old school futures arcade.
You pay a company money to take some trading challenges. If you pass those challenges you are given money to trade with and any profits you make are split with the firm.
My Forex Funds (MFF) was one of the big players in the sector but it halted trading last week after it emerged that a provincial Canadian regulator and the CFTC in the US were investigating the company. The CFTC ordered the firm’s assets to be frozen.
Off the bat, the guy that ran this firm, Murtuza Kazmi, is toast. We can wait for him to have his day in court and so on, but I would be very surprised if he is not guilty of everything the CFTC claims he did.
But the case is interesting for a few reasons, starting with what the CFTC is actually going after him for.
Don’t run an unregulated broker in the US
One of the reasons prop shops are becoming so popular is that they are subject to much lighter regulation than brokers are.
There are really two key components to the business – people paying to take the challenges and people that pass the challenges trading on your company’s own account.
Because the former only involves trading a demo account, no client assets are held and no securities are traded. This is not a regulated activity. The ‘real’ trading of the business is also very lightly regulated because no financial services are actually being provided – you are just trading a company’s money.
It was with regard to the former where Kazmi was mind-bogglingly dumb. He gave people two options
They could…
- Pay to take a challenge and trade on a demo account
- Pay to ‘skip’ the challenge and go direct to trading the ‘company’s money’
The problem with step 2 was that the account equity was equal to the amount the client paid to ‘skip’ the challenge. “Yes my friend, if you pay £100, you can skip the challenge and we’ll give you money to trade with. How much money? Well, £100 of course!”
So as you can infer, clients were not ‘skipping’ anything. They were just making a deposit into an account with a broker that MFF was operating and then trading securities. Trades were also made against the client’s own book.
To make matters worse, Kazmi and the company claimed…
- Clients were trading against third-party LPs
- Applied ‘commissions’ to client trades that weren’t mirrored by anything
- Claimed that the way MFF made money was from people trading profitably for them
- Deliberately increased slippage and widened spreads for profitable clients
What makes the allegations in the CFTC case interesting is that they appear to refer to the real trades that clients made but not those placed on demo accounts.
In other words, MFF might have still got wrecked for fraud if they were just offering demo accounts, but it’s not clear that they would be getting hit anywhere near as hard as they are if they had done that alone.
The core around which much of the CFTC’s case is built is the fact that MFF was…
- Offering certain OTC derivatives that are prohibited in the US
- Offering FX derivatives without being regulated
- Committing fraud in how it marketed these products versus the actual practices of the business
Imagine if I came to you and said I had a business model which involved doing all of those things. And not only did it involve those things, but also the person running this business is a US citizen and based in the US.
Probably you would start calling up funeral parlours or buy me a copy of ‘The Dummy’s Guide to Serving Life in Prison’.
My Forex Funds Made lots of money
Although they offer attractions compared to the brokerage sector today, something that I’ve always wondered about is how much you can really make from running a prop shop.
This is because they appear to be more susceptible to the price elasticity of demand. A broker deposit has high potential upside. If you get a big client they might deposit millions with you.
In contrast, there is, you would imagine, a limit on how much you can charge someone to take a trading challenge.
Then there is the question of retention. A client that blows up their account may come back to you. Would someone that failed a trading challenge keep doing that?
I don’t know the answers to these questions but it is still clear that MFF was making an absolute fortune from convincing people to use their services.
The CFTC claims net revenue was more than $310m. This was over a period of under two years.
Now you could say, ‘yea but it was a fraud’. Correct, but the part of the business that the regulator was most annoyed about is not (as far as I know) what most prop shops are doing – it was just a scammy b-book operation.
Perhaps more importantly, this seems to have been detrimental to their bottom line because it meant they had to pay out to profitable traders. Had they actually let them trade the markets as promised then that wouldn’t have been a problem.
So I guess that means my theory was wrong? You can make a lot of money doing a prop shop.
Was there a nark?
If you read through the case that the CFTC has made against MFF, it is clear they had access to communications between MFF’s ‘Head of Risk’ and someone at a trading platform/software provider.
MFF used MT4/5 for trading and probably had a white label, although it’s difficult to tell. The complaint does not say who the company is and the only real hint you get is this:
“Kazmi executed an agreement dated September 13, 2021, with the [software provider] to lease servers for trading by Traders Global customers.”
Anyway, the person at the platform provider helped MFF add slippage or widen spreads on clients that were trading profitably. You can read a few of the messages between MFF’s risk guy and the person at the software provider. Some of them are real gems, like…
Traders Global Employee A wrote, “our traders are getting slaughtered today[.]” “[L]ike overall?,” asked the Advisor, “Or a ton getting shutoff from downdraws?” “[B]oth i think,” replied Traders Global Employee A. “[N]ice,” wrote the Advisor.
Or…
Traders Global Employee A wrote: “we violated more accounts than made today. so hopefully the net is massive loss[.]”
Aside from being amusing, the interesting question here is how the CFTC got these comms.
To draw a comparison, Binance comms that they have published before were taken from across the company and different employees. In this instance, all of the communications they published are between MFF’s head of risk and someone at the platform/software provider.
Assuming the CFTC did not request them, how did they get a hold of the comms between the risk guy and the platform provider?
Interesting!
Why did My Forex Funds bother scamming?
The thing that always boggles my mind when I read stuff like this is why the people bothered pulling off a scam like this in the first place.
If you run a fully ‘legit’ prop shop operation, with the model described at the start, then the odds are so stacked in your favour that it seems pointless. The major risk you face is a funded trader blowing up, something that could probably be mitigated by drawdown limits or some kind of automatic close out.
The main things that seem to prevent this from happening can probably be bracketed under either operational ineptitude or mindset.
With regard to the former, you need a strong balance sheet and basic risk management rules in place. If you do not have these things, you probably shouldn’t start a broker or prop shop or really any business.
With regard to the latter, greed is obviously a factor but so too is the view that, because the odds are stacked in your favour, it’s ok to scam people.
That feeds into our final point, which is that many people seem to think that because props are ‘not regulated’ you can….just commit fraud? I’d guess Kazimi and his crew thought the same thing. And look how well it worked out for them!
Getting scammed offshore
The Comoros is a country somewhere. We’re not sure where exactly but it is definitely real and is somewhere out there in the world. One of the things that is not real is the Mwali International Services Authority (M.I.S.A.).
This is a regulator that many brokers have apparently been eager to sign up to since St Vincent and the Grenadines, another famous financial hub, started saying people needed to follow rules and laws and stuff earlier this year.
“Starting in the spring, our team was hit with a wave of inquiries about regulation in Comoros,” Atomiq Consulting CEO Jonathan Baumgart wrote on LinkedIn last week. “The license was being pushed aggressively by many of our competitors so people were shopping around to get the best price.”
Alas, according to reporting on FinTelegram, the regulator is fake. There is no regulatory body based in Mwali (wherever that is) and so the licence the ‘regulator’ purports to issue is a dud.
But this raises another question. Did the brokers themselves going there get scammed or did they know it was a scam but didn’t care?
Both options are bad but the first is funnier so I hope it’s that one.