Remember the hype around prop trading firms some years back? Well, now we’re in another wave – the wave of prop trading firms closing down one by one. We have seen SurgeTrader, True Forex Funds, Skilled Funded Traders, and The Funded Trader, as well as Stocknet closing down recently. Furthermore, the rumor has is that things are on the rocky side with the Trading Pit, too.
What’s happening?
Why are prop trading firms closing? As the ForexPropReviews wisely point out, it comes down to the sustainability of the business model. Most prop trading firms use their own capital and are more vulnerable to market fluctuations.
While more established financial institutions maintain substantial reserves to cushion against market downturns, many prop trading firms operate with thin margins. As a result, it’s harder for prop trading firms to survive prolonged periods of market instability. This model simply could not be sustainable, also as it required high marketing spend as we saw prop trading firms running high value campaigns. It is a not-so-well secret that some of them had been funded by brokers in order to boost their own clientele and trading volumes. And while it may seem like a great idea, it could never bring the ROI to make it worth it.
MT4 Armageddon and Regulation Concerns
When prop trading firms and their ads started popping up a dime a dozen, many had concerns of their regulation status. Unlike trading brokers, prop trading firms did not require any regulation, which made them free to give investment advice and turn to all kinds of unethical practices, unthinkable to regulated brokers. Plus, who else could get hurt?
In February 2024, MetaQuotes, the company behind the popular trading platforms MetaTrader 4 and MetaTrader 5, started cracking down on prop trading firms. The technology company has forced Blackbull Markets, which was grey-labelling its MT5 licence to prop trading firms, forced the broker to terminate its services to Funding Pips. Other firms followed.
The reason for the move was the fact that companies offer their services to US-based clients, which requires additional authorization. As you might guess, they usually don’t have them.
Some firms circumvented this through an intelligent approach by using other entities’ licenses. An example is Blackbull, which grey-labeled its own MetaTrader license to prop trading companies like Funding Pips. Meanwhile FTMO, the “grandpa of prop trading” on Twitter, gained attention, but MetaQuotes eventually finally decided to curb this process.
So what is the takeaway from this latest trend? Prop trading was a great idea while it lasted, and some traders have benefitted from incorporating it into their trading strategy, but as we can see, the tide is changing.
