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Here is something that is unfortunately not that hard to do.
You sign up with a broker and set up a MAM, PAMM, or some other copy trading product.
You game the results to look good for a while and market the account loads to get a lot of money in.
Once there is a lot of money in, you blow up the account deliberately, and do a ‘profit split’ with the broker.
This happens from time to time.
Last week, a prop firm called Funded Unicorn shut down.
As TradeInformer reported on at the time, the company said it had to shut because it was mirroring funded account trades one-to-one in the real market. Because those accounts kept blowing up, it meant the business was unsustainable and they had to shut down.
We’ve looked at the difficulties props face with hedging in the past and the main problems are really down to randomness and the risk/reward dynamic the prop model creates.
With regard to the former, prop challenges are more about gamification, and less about finding someone who is actually good at trading.
Consequently someone who passes a prop challenge is more likely to just be lucky, rather than someone who is actually a consistently profitable trader. The fact most people blow up their funded account in about three weeks is a sign of that.
With regard to risk/reward, props have to pay out a huge proportion of profits – usually 80% to 90% – that funded traders generate. Account sizes are often large as well. However, if those accounts blow up, the prop has to take the entire loss.
In practice this means that there are huge pitfalls to actually hedging funded accounts. Firstly, because funded account sizes are large, margin requirements are high and eat up your prop’s cash holdings.
The prop then only keeps a tiny proportion of any money that gets made. To top that off, if an account blows up, the prop wears the loss, not the trader. So if you imagine hedging this, it would most likely mean you are putting down a lot of cash, with very little upside, and a lot of potential downside, given how likely it is an account will blow up.
The result? It’s plausible that Funded Unicorn did indeed in some way hedge funded accounts and end up losing a lot of money.
But what if that isn’t what actually happened?
Funded Unicorn was set up by a trading educator called Thomas Hartmann, who is based in Germany.
Like basically every other market where educators exist, he sells courses, mentoring, and has a social media presence. To be fair to him, he does not seem like the worst of this type of person, even if he has a video of himself pretending to trade in the back of a blacked out, chauffeured Mercedes.
However, a more interesting point with Hartmann is that in 2019, he seems to have run a ‘successful’ copy trading scheme targeting clients in Germany.
After building up more than 1,500 followers and €5m in copy funds, the account was suddenly blown up. One German trading forum, which was tracking the performance of the account, wrote this…
Hartmann destroyed the account yesterday, and all my copied trades were closed with a margin call. Why he worked with this risk and without a stop loss yesterday is still unknown. We’ll have to wait and see if there’s a statement. Even the good results of the previous weeks are of no use. The fact is, there was a loss of around 70%, and the exact figures will be released this weekend.
And then a few days later…
As everyone can imagine after the update on Tuesday, this was not a successful week. Trader Hartmann acted against all of his own rules and wiped out the account within 12 hours. He had over 1,500 subscribers in total and burned through 5 million. Simply incomprehensible… Things are really going crazy in various Telegram channels. For me, it’s a case of ticking it off and moving on. There’s nothing you can do about it now anyway.
Interesting!
Now imagine that you take these principles and apply them to the prop space. How you structure it would have to be up to the person running the prop but the bottom line is that you could have some kind of revenue share agreement with a liquidity provider, you could do something kind of like this.
You are taking in challenge fees as your source of revenue and funding for any ‘live’ accounts. So you are not having to really invest or put any of your money down, other than marketing and technology costs of setting up the prop.
Whether or not it’s deliberate or something else, you can basically rely on the end trader blowing up at some point.
The thing is, you could also do this in a legit way and just continue running your firm.
Alternatively, you can take on a bunch of people, wait for a few of them to blow up, take the money and go. Then you can say ‘sorry guys, we just can’t keep going, too many clients blew up’.
Maybe you could even just pretend to a-book everything, say it didn’t work, then cut and run with the money.
After that you can head off to sunny beaches and sip cocktails, like at the end of Trading Places.
Is that what happened with Funded Unicorn? I guess we’ll never know. But would you be that surprised if it was?
