Prop firms have seen a recent insurgence in popularity, offering traders the opportunity to trade with the firm’s capital in exchange for a share of the profits. But this growth has attracted increased scrutiny and regulation, leading to the closure of several prominent firms. The closure of the popular firm, My Forex Funds, which sent ripples through the industry and led to many people wondering if this was the end of prop firms altogether.

In this article we’re going to explore the current state of prop firms, the reason behind their closures and how traders can protect themselves in this evolving landscape.

Summary:

• A prop firm provides traders with a large amount of capital to trade with.
  
  
• There has been an increase in regulations and ensuring that they are more reputable which has made many of the unreliable firms close.
  
  
•  Unreliable firms can be avoided through thorough research and ensuring only paying with credit cards (not cryptocurrencies).
  
  
• If your firm closes down, try and attempt a bank chargeback.
  
  
• We recommend the use of multiple firms, cash out as soon as possible and use the funds to build your own personal trading account to combat scams.
  
  
•  Reliable Prop firms offer valuable opportunities and should be explored by traders.
  
  

What is a Prop Firm?

A proprietary trading firm, known better as a prop firm, provides traders with capital to trade with in various financial markets, such as forex, stocks, and commodities. In return, the trader shares a portion of the profits with the firm.

Before having access to funds, prop firms typically evaluate traders through a series of prop firm challenges to ensure they have the necessary skills to manage the firm’s funds responsibly. However, there are some bots that can easily pass these challenges within minutes.

One of the most important things about a prop firm is that they provide traders a greater amount of capital. This allows you to trade with larger position sizes and take on more risk. But this comes with the risk of account closure if you lose more than the allowed daily drawdown (speaking from experience this is very easy to do and so I would recommend beginners to start on a demo account before moving onto a prop firm). 
 

Benefits of Prop Firms:

As a prop firm trader, there are many benefits that allow you to boost your skills and develop in your trading career. Some of these include:

• Access to capital: you can access more money to trade with, which can help to massively increase the gains you receive.
  
  
• Risk management: As you hold control over the firm’s capital, there are strict risk management regulations which can be beneficial for traders to learn and enforce the importance of losses.
  
  
• Reduced Risk: If you make a mistake that causes your account to blow, unlike a personal account where you would lose everything. With funded accounts you only lose access to the account rather than the money at stake.
  
  

Although prop firms hold these benefits, they have also come with associated risks. Prop firms traditionally don’t have the same regulatory protections that traditional brokers do, although more restrictions and regulations have begun to be added, hence why many are being shut down. They also make traders put up money as collateral in case they fail the challenges set by the scheme, this is the main way that these firms earn profit.

Why are Prop Firms closing?

Prop firms face a variety of challenges that have led to closures:

1. Regulatory Scrutiny: As the popularity of prop firms has increased, so has the scrutiny from regulatory bodies. Many prop firms operate in a grey area, and tighter regulations can lead to further shutdowns if they fail to comply.
   
   
2. Financial Mismanagement: Some prop firms may struggle with poor financial management, leading to bankruptcy.
   
   
3. Fraud and Scams: The industry has attracted fraudulent entities posing as legitimate prop firms, leading to distrust and regulatory crackdowns.
   
   
4. Market Volatility: Unforeseen market events can lead to significant losses, challenging the financial stability of prop firms.
   
   

Examples of Prop Firms That Have Closed

There have been over 45 prop firms shut down in the past year, a few of these include:

FTMO Clone Firms: Several firms attempting to mimic the successful model of FTMO without proper risk management or regulatory compliance have also shut down.

My Forex Funds: One of the largest prop firms, known for its genuine operations and popular challenges, faced closure due to several factors which can be used as good examples at why Prop Firms can be risky.

Allegations against My Forex Funds:

The Commodity Futures Trading Commission (CFTC) cited several critical reasons on the closure of My Forex Funds. These allegations are the primary reasons why other firms have also been closed.

1. Misrepresentation of Fund Allocations: the firm claimed that customers received live funds for trading through third-party liquidity providers however the firm acted as a counterparty for their customers trades. This misled the customers into believing they were trading in a live market, when in reality they were trading against the firm itself.
   
   
2. Deceptive Profit Model Claims: the firm suggested that they benefited when the customers succeeded, implying a mutual interest in profitable trading. In truth, the firm only profited when their customers lost money, creating a conflict of interest, violating ethical standards expected in financial trading.
   
   
3. Misleading Sources of Payments: the payments to successful traders were claimed to come from trading profits but the CFTC uncovered that the money had come from fees paid by other customers. This meant the firm had a constant reliance on an influx of new customers to pay existing ones.
   
   

The closure of these firms is often a result of deceptive practices, regulatory violations, and unethical business models. As a trader, it is crucial to conduct thorough research before choosing a prop firm to ensure that they demonstrate clear, ethical practices and regulatory compliance.

How to avoid getting scammed by a Prop Firm?

Although the negative press prop firms have recently experienced, there are still firms that follow proper regulations and can be trusted.

Before choosing a firm, research them thoroughly and investigate their history, reviews and regulatory status.

When paying for access to a prop firm, always pay with a credit card. Avoid payments that involve cryptocurrency, this has far less buyer protection then credit card payments.

Check that the firm offers a transparent explanation of its profit model, risk management rules and trading conditions.

Look into diversifying your prop firms to avoid placing all your investments in one basket. Similarly, try and withdraw profits as soon as possible to prevent them from being locked up.

The Prop Firms you can trust (as used by us):

We know there are a lot of scams out there, these are the ones that we currently trust in May 2024 and the moment our attitude shifts, we announce it in our discord channel to ensure our members are as safe as possible from any scams and fraudulent activity. While we cannot fully guarantee any firm, we do use these Prop Firms:

1.  Ftmo: offers you a balance of up to $200,000 and pays you 80% of the profits you earn. The payout will be processed after 14 days. Also if you meet the requirements for their scaling plan you get a balance increase of 25% and a payout rate of 90%.
   
   
2. MyFundedFx: Once proven you can successfully trade, you earn 80% of the profits of your trades. With the scaling plan, accounts can scale up to $1.5 million.
   
   
3. Fxify: offers you to trade with up to $400,000 starting capital and offers over 15 different payout options.
   
   

What to do if your Prop Firm closes down?

1.  Attempt a Bank Chargeback: Contact your bank to dispute the charges and potentially recover your funds.
   
   
2. Document Everything: Keep records of all communications and transactions with the firm as evidence of any mismanagement.
   
   
3. Seek Legal Advice: Consider consulting with a lawyer who specialises in financial fraud or consumer protection. Although this strategy should only be considered if you are owed a lot of money by that prop firm.
   
   

Should I use Prop firms?

Despite the risks, reputable prop firms can offer significant benefits. The good ones can really help speed up the growth of your personal account.

To reduce the risk, you should make sure that you don’t have too many accounts with the same firm in case they go down. While using multiple firms to mitigate risk, cashing out as soon as possible in each firm ensures that even if the firm does go down, you may have earnt a small amount of profit from it.

From each cashout, you should use the funds to help build your own personal fund to move your reliance away from prop firms. Through each experience in trading, you will grow in expertise and Prop Firms are great to build up your trading experience for your own funds.

Always be wary of the risks associated with trading. Always ask questions if something doesn’t feel right and use your knowledge to your advantage!

Conclusion:

Prop firms provide a valuable opportunity for traders, but they do come with risks that require careful and consideration before choosing to use a prop firm.

Through understanding the factors that contribute to firm closures and taking proactive steps to protect yourself, you can navigate the prop trading landscape more safely and effectively.

If you are looking to set up a prop firm account and need assistance in passing the prop firm challenge feel free to get in touch, we’d be happy to help you.