Start a prop firm with cTrader today
One of the interesting features of the iFX Expo this week was the number of props in attendance. I last went two years ago and don’t remember there being many at all. The time prior to that there were none as most of them didn’t exist.
Pretty much any conversation you have with a prop firm will involve the ‘are you getting hit by all the scammers all the time?’ line of questioning. The answer is usually ‘yes’ and then a forlorn look into the distance.
However, a more interesting question is ‘have you been hit by the gold scammers in China yet?’ This usually elicits a confused stare and curiosity as to who these scammers are.
For the broker industry, these guys are old news, although they are also a mystery in the sense that no one seems to know how they actually do their ‘work’.
The basic model seems to be that they make large deposits at different brokers, then hit the gold price during the Asian trading session. Two people I spoke to this week in Cyprus also noted that they have become more sophisticated and now likely operate with smaller accounts and then share the trades via a signal.
Whatever the case, the main point is that they are capable of (somehow) moving the market.
How they do this is an open question but theories include an ability to directly manipulate the futures market or that they are hitting CFD providers so hard that it ultimately filters through to the underlying market itself from hedging activity.
Two representatives of one such player, who is allegedly also able to move the price of an FX pair, were in attendance at the expo looking for new victims. Alas, they would not tell me their secret.
Even if brokers don’t know what method these people use to abuse brokers via gold trading, they at least have a decade of experience in managing them. At a minimum they can just get rid of all the flow by sending it to their LP.
Props are in a much worse position for a couple of reasons. Firstly, they seem to have no experience in dealing with gold abusers, which means they are likely to be completely unprepared for them if they do start trading with them.
More importantly, brokers have at least some ability to manage the liability that they create by hedging with their LP. Flow can also potentially be offset by other clients. Props can’t do that.
So far most props have dealt with abusers by changing the challenge conditions and the terms they’re offered under. Banning news trading, for example, is a simple way of blocking people who open two opposing positions from taking advantage of big price swings.
You cannot do this with gold traders because they aren’t trading news – they’re the one moving the price.
This basically means you can end up with the sort of huge, unsustainable liability that a prop would have if it allowed something like news trading, but where it is very difficult to see what terms and conditions you could make that would prevent it from happening.
The potential outcome for props could be catastrophic. If you think back to last year, a lot of firms crashed and burned because of their inability to manage abusers or even legitimate flow from people that pass challenges.
So far the gold abusers don’t appear to have hit the props. But if they start doing it, it’s plausible companies that aren’t prepared are going to get hit very hard. More companies crashing out of the industry could be the outcome.
