The recent My Forex Funds incident has brought the attention of regulators to the lesser-prioritised segment of the financial market – Proprietary (Prop) Trading. Yet even with regulators sniffing around the edges of what may be a passing fad, more brokers are sitting up and paying attention to the allure of a direct revenue stream. As a financial services marketing agency, Contentworks, closely follows the latest developments in the finance space. Recently, we were at FX News Group taking a deep dive into prop trading and considering how marketers can walk the fine line of generating excitement and remaining compliant.
A Quick History of Prop Trading
Prop trading in some form or another has been around a long time, but it was after the 2008 financial crisis it began gaining popularity. In 2020, the global prop trading market was valued at $6.7 billion and with an expected CAGR of 4.2% from 2021 to 2028. In other words, interest doesn’t seem to be slowing down.
Marketing in the prop trading space centres around Trading Challenges. A prop trading challenge is an assessment used by proprietary trading firms to evaluate a trader’s skills. It consists of meeting specific profit targets within predetermined risk parameters. Usually there’s a fee, or deposit, to participate in the challenge, and if successful the trader is then offered the firms funds to trade with, getting a percentage of profits from their trading.
Meet Your Target Audience
Who are the prop traders? From a marketing perspective, it’s important to know your audience before you start. Here are some key takeaways:
- Proprietary traders are 74% more likely to work at private companies in comparison to public companies.
- 3% of all proprietary traders are women, while 95.7% are men. But don’t discount the smaller percentage. In 2022, women earned 90% of what men earned.
- The average age of a prop trader in the US is 43 years, with 58% over 40, 28% between 30 and 40, and the rest below the age of 30. Knowing this can help you strategise content better.
- New prop traders will be looking to brokers/firms to provide concise and transparent information about the Challenges, Platform and Broker.
- The most common ethnicity of proprietary traders is White (66.1%), followed by Asian (12.5%), Hispanic or Latino (11.6%) and Black or African American (5.5%). LATAM is an up and coming region brokers are seeking to target, along with Africa.
- The most common non-English language among proprietary traders is Spanish at 26.1%. Russian at 8.7% and Portuguese at 6.5% according to Zippia Research.
We asked Anton Sokolov, Marketing Manager at technology provider Brokeree:
What makes a great prop trader?
In my view of the world a prop trader is not different from any other good trader. As long as a trader is consistent and knowledgeable about a chosen trading symbol they should not have any difficulties staying within required risk levels.
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Prop Trading or Trader Funding
While definitions between the two are blurred, the fact is that neither hold any client funds. And with no regulatory oversight, this opens up a host of marketing and promotional opportunities. As in the early Wild West days of forex, prop trading has, and is facing its share of scams and charlatans.
Sokolov says:
I won’t be surprised if we see a measure coming from one of the regulators within a couple of years. The main issue right now is that it is too easy to open a trader funding firm, and nobody cares to check whether such companies will deliver on their promises.
The Elephants in the Room
My Forex Funds was charged by the Commodity Futures Trading Commission (CFTC) for fraudulently seizing $300 million. The firm allegedly promised its retail customers that they would become “professional traders” using Traders Global’s money. However, it made Traders Global the counterparty in many trades, conflicting with the interests of traders. This violated the Volcker Rule. That said, the rule applies to banks and hedge funds, and My Forex Funds is neither. Yet, it was in breach of clearly communicating the working mechanism of the arrangement to traders.
Noticeable in the My Forex Funds incident is that the prop trading firm also runs trader funding programmes. While this is not illegal, transparently communicating the account type and its implications on the way funds are managed and profits split is critical. This has intensified the discussion around regulatory oversight over prop trading. Transparency in operations, reporting, and communication is key in the financial space. Clearly and proactively informing traders about the kind of relationship the prop firm has with them, the capital risks involved, and the division of profits.
As Blake Olson, CEO of Smart Prop Trader, said on Forbes:
Prop firms should focus on transparency, starting with openly sharing information such as financial data, operational processes and decision-making factors.
Simultaneously, MetaQuotes banned multiple brokerages that grey-labelled its platform for US-based prop firms. The primary reason cited is the MetaTrader parent’s inability to earn from prop trading-like arrangements. Prop firms usually allow traders to trade on simulated demo accounts and copy their trades in live markets to profit from price movements. Since they are only using a demo version of MetaTrader, MetaQuotes does not earn from platform usage. Moreover, demo accounts are historically intended for retail traders to learn and not for prop firms to earn.
The State of Prop Trading
In 2007/2008, the banking crisis highlighted how financial institutions had been taking risky positions with customers’ capital. This is when Volker’s Rule was implemented in the US. The rule prevented banks from making speculative investments that risked their clients’ money. Basel 2 is a similar regulation in Europe. It mandates that banks handle client funds with extra caution and not indulge in high-risk investment activities. While prop trading is a disconnected sector, recent developments have raised doubts among traders. It has also intensified the discussion about the right way to proceed among regulators.
Regulatory Reforms
In 2021, financial watchdogs in the EU announced that prop trading firms must follow the Investment Firms Regulation (IFR). However, proprietary trading firms lobbied against it, vouching for modifications to the framework. They have since refused to take hand-me-downs from the banking sector. Prop shops state that the playing field is skewed and advances in technologies, like AI, favour larger players.
The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have initiated a capital requirements review for trading firms to assess if bank-like regulations can be directly applied to them. The verdict is expected in 2025.
We asked Nicolas Shamtanis, CEO of Netrios:
Do you think prop trading will eventually pique the interest of regulators?
There are many opposing opinions on this matter. On the one hand, many people are anticipating some sort of regulation as this is a growing industry that is currently not under regulatory scrutiny. Given that the majority of prop owners have no substantial financial services background, sometimes the operational model that they choose for their firms ends up being unsustainable which has led to some of their clients being treated unfairly.
However, the nature of the business model differs completely from traditional CFDs which are regulated heavily. First and foremost, when entering or purchasing a challenge, the prop trader is not depositing funds with the firm. It is a purchase of a participation fee. This by itself categorises it substantially differently from an AML perspective.
I think in the end, the industry will self-regulate in the sense that we will see a massive consolidation of prop firms going forward. Given that the business model will be the same and no significant innovation will come in the space, I anticipate that in the next few years, 20 prop firms will control 90% of the market share.
Competitive Landscape
FTMO, one of the pioneers of prop trading, announced at the 2023 Finance Magnates London Summit, that the industry is approaching consolidation. FTMO’s CEO, Otakar Suffner, went on to state that although the segment’s reputation was constantly questioned through 2023, the segment would stabilise going forward with 70% to 80% of the market being dominated by the top 3 major players.
While FTMO took 5 years of bootstrapping, newer firms have more opportunities since trading has become much more popular and accessible. This further intensifies the competition in the sector and smaller players must ramp up efforts to prevent monopoly. While established firms like The 5ers and Flow Traders had a head start there seems to be plenty of white space in the market.
Anya Aratovskaya Director of Marketing at FOUNT, has worked with many prop or trader funded firms and says
Funded Trader set up offers a good nurturing opportunity for the existing client base and provides a rather predictable cash flow, considering the fluctuations in retail FX broker revenue. Assuming a retail broker already has an existing client base, adding a funded trader setup is rather straightforward and relatively inexpensive.
And her top tips to brokers or firms looking to introduce trader funding:
The biggest issue is lack of a basic marketing plan. The second is the tendency to simply copy competitors’ websites using AI (yes, I’ve seen that more than once). Third, Discord and Telegram spam bot campaigns. Caution is needed when running paid Google ads, as Google is still sleeping on allowing ads for “trader funded firms
Another technique that brokers have adopted is brand diversification. Since the prop trading space is loosely regulated, this gives ample room to experiment, while the traditional trading platform and associated marketing initiatives comply with specific regional regulations. This allows them to protect the brokerage in case regulations change and still reap the benefits of prop trading.
Contentworks is a leading financial services marketing agency that works with brokers, prop trading firms, and other fintechs to build and implement targeted marketing strategies. Book a free Zoom call to drive acquisitions for your brand.