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A basic problem with the prop industry, which we looked at already a bunch of times, is hedging.
It is very difficult for firms to know who should be hedged and how exactly to structure that activity.
One way to remove this problem is what Bullrush has done and just run trading tournaments with a fixed prize pool.
Traders pay to enter and then get a fixed prize if they win. Bullrush then takes part of the money from the overall prize pool.
Consequently there is no risk. But there is also likely to be less revenue opportunity. Ultimately the prize pool has to be an attractive proposition to the potential buyer and if you’re taking a huge cut, it can be hard to make good money from it. Plus trading contests are competing against other people and a lot of traders prefer the idea of hitting a pre-defined target and being rewarded for doing so.
This is why I think Eightcap’s new product is very interesting – both from the end client’s point of view and the prop firm’s.
For those that didn’t see this, Eightcap is ‘back in the game’ with prop trading and now offers challenges directly. Previously they were a big third-party services provider to the sector but stopped when MetaQuotes went DEFCON 1 on the sector at the start of last year.
They have a standard set of challenges but one that’s particularly interesting are ‘Day Trader’ challenges.
These are structured so that you select…
- The time frame you trade over, ranging from 1hr to 8hrs
- Your stake, which ranges from $5 to $250
- The payout multiple, which can be 2x / 5x / 10x the stake
From the trader’s perspective there is something fun and gamey about the process. You have fixed odds, you know how long it will take to win (or lose) the money, and it will happen fast. The longest challenge is only eight hours.
There is some downside in the sense that you are capped at how much you can make. A ‘real’ prop account has theoretically unlimited upside, which is why you see huge payouts from firms.
However, that provides a huge benefit to the prop firm. The biggest payout that Eightcap would have to make is $2,500 – a $250 stake with a 10x multiplier.
That is obviously far more manageable from their point of view compared to a payout that could be $50,000+.
That points to another potential benefit, which is that this could be relatively scalable. If you are big enough, you could afford to take a $2,500 fee and pay out $25,000.
That would also be a more attractive proposition to the end trader. It’s hard to imagine someone paying that amount for a challenge. But if they could theoretically 10x their money in one hour, it’s not hard to imagine them doing it.
There are a couple of potential downsides to this model. One is regulatory. When you offer ‘regular’ prop, the idea is that you are being evaluated and then passed through to a live account – however dubious that latter part may be – and you then trade with real funds.
Consequently that fits into an unregulated area of the market. Neither part of that activity would be regulated.
If you offer a fixed-odds payout then, even if it’s on a demo account, it feels like it could lean towards being regulated. Having said that, I assumed Bullrush would have to get licensed in the UK but they got the go ahead to go ahead without it.
The other problem is less about Eightcap and more about the incentives of the model. I had lunch with someone this week, who noted that he understood prop as a whole but felt it would draw bad actors like moths to a flame.
If this model is scalable then it could end up attracting the same bad sorts of people. Remember that IG, Deriv and others all offered binaries for over a decade before scammers realised they could use it and rip people off. Let’s hope the same thing doesn’t happen with this.
