In a significant development that has sent ripples through the world of proprietary (prop) trading, MetaQuotes, the developer behind the widely-used MetaTrader platforms, has initiated a crackdown on prop trading firms utilising its technology, particularly those with active US clients. This move comes amid broader concerns about regulatory compliance and the unique business models that prop trading firms employ.
Prop firms, which provide traders access to capital in exchange for a share of the profits, have grown in popularity, offering retail investors the chance to trade with substantial funds, ranging from five figures up to seven. It is estimated that one-third of these firms' clients are based in the US.
The relationship between prop firms and technology providers has come under scrutiny following MetaQuotes' decision to enforce stricter controls over its licencing agreements. The issue came to light when Blackbull Markets, a broker that had been offering grey-label MetaTrader services to prop firms, announced the termination of its services to prop firm Funding Pips, a decision driven by MetaQuotes' concerns over the presence of active US accounts. Firms should already have been cautious about accepting US clients after the CFTC sued My Forex Funds for alleged fraud, shutting them down overnight.
Prop trading firms have developed a model where traders, after passing evaluation programs, use demo servers for simulated trading. The firms then claim to replicate these trades on live servers, sharing profits with the traders. Due to the pricing structure of MetaTrader licenses, MetaQuotes does not generate direct revenue from demo server activities.
Apart from Blackbull Markets, Purple Trading, another brokerage that licences MetaTrader, also ceased its services to proprietary trading firms earlier this week. While Blackbull's actions impacted only one identified proprietary trading platform, Purple Trading provided services to multiple proprietary trading firms, such as Funded Engineer, AquaFunded, Goat Funded Trader, The Funded Trader, and Skilled Funded Traders, among others.
The United States, with its stringent regulations on leveraged trading services, has become a focal point of contention. Prop firms have operated in a regulatory grey area, attracting US clients despite the ban on offering Contracts for Differences (CFDs) to retail traders. The recent actions by MetaQuotes and the scrutiny from US regulators signal a tightening landscape for prop trading firms, especially those targeting US clients without proper regulatory adherence.
Proprietary trading firms do not accept clients' funds for trading or investment purposes. Instead, they offer trading "challenges" for a fee. Traders who complete these challenges are eligible to trade with funds provided by the proprietary trading platform.
Furthermore, the industry response to these developments has been mixed. Some view the regulatory and technological crackdowns as necessary steps towards ensuring integrity and stability in the prop trading space. Others worry about the implications for traders and firms accustomed to the flexibility and opportunities provided by platforms like MetaTrader. Funding Pips has now restricted the US, UAE, and Vietnam, while Top Tier Trader has added Germany, Vietnam, the UK, and India to their restricted list.
As the situation unfolds, prop trading firms may need to navigate an increasingly complex regulatory and technological environment. MetaQuotes' stance, coupled with broader regulatory attention, could prompt a reevaluation of business models and strategies within the prop trading industry. We have already seen several other technology firms attempting to enter the space and offer solutions for prop trading. The future may see prop firms seeking new technologies and partnerships to continue offering their services, albeit within a more constrained and regulated framework.
The unfolding scenario presents both challenges and opportunities for innovation in prop trading. As the industry adapts, the emphasis on compliance, transparency, and sustainable business practices will likely become more pronounced, shaping the future of proprietary trading on a global scale.