Are Prop Firms A Scam??
Special Episode: Chapter 2 of the Prop Firm Series
In Chapter 1 of my series on prop trading, I introduced you to the basics. Since then, however, all hell has broken loose as a well established FX Prop Firm has been shut down by regulators in Canada and the US with claims of it being a scam.
So the question on everyone’s lips is this: Are all prop trading firms a scam?
Will this entire billion dollar industry now get closed down? Today’s episode was meant to be all about managing risk using prop firms, instead I think it is better that I dive into what exactly happened to My Forex Funds (MFF), why it has been shut down with no notice and what the implications are for the wider industry. Let’s go:
What happened to MFF
Early Friday morning news broke out that My Funded Forex, a prop firm that primarily focusses on popular currency pairs had been shut down and was under investigation for fraud. The most serious charges laid out against them are:
1. MFF used specialized hidden algorithms to ensure that traders were always filled at the worst possible price
2. MFF lied to customers by telling them their funded accounts were being traded on an exchange when in reality accounts were being simulated
3. Evidence shows that a successful trader was being targeted by MFF and their agents in order to ensure his/her account failed as the successful trader was taking profits away from the company
4. MFF advertised on their website to traders that “when you make money, we do too” but their business model was based on profiteering from failed accounts
5. Funded traders accounts transactions were being re-routed to foreign entities in order to give them a worse spread
6. MFF drawdown rules and implemented in “bad faith” to ensure the house always wins
The above are a serious set of allegations that will no doubt have wide ranging impacts on the industry as a whole. But does all of this really mean that every prop firm is a scam and will be shut down? The truth often lies somewhere in the middle. So let’s compare what we know about Apex and see what we find out:
Using hidden algorithms
Apex uses both Rithmic and Tradeovate in order to provide transactional data to clients. It is hard to know how much these platforms can be manipulated locally as Apex offer users the ability to use their trading software such as Sierra Charts rather than what MFF were doing by only providing one platform (MT4) to trade on. This could well mean that they were ring fencing their users platforms in order to perform their alleged manipulations.
I have read recently that Tradeovate do offer better fills to users over Rithmic but I myself have never experienced this issue. The fact the Rtrader, NinjaTrader and any other charting software that allows third party plugins to be used via Apex can only be a good thing and does not fill me with dead.
Lying to customers by telling them their accounts are trading on exchange
On this point, it is very clear that Apex explicitly state their intentions from the start. Their website goes into good detail that:
All evaluation accounts are sim traded
All funded accounts are sim traded too
Once a funded account shows consistency Apex make your account a Performance Account and will copy your trades and allow you trade through the exchange
MFF on the other hand told their customers that once funded their accounts were being traded on the exchange. The difference between these two approaches are clear for me.
Targeting of Successful Traders
This point is impossible for an outsider to prove. However, Apex have done webinars with their most successful traders in order to share how they became successful and some of the methods and strategies they employ in order to maintain their consistency. I am not sure what MFF but I do know people were being paid via their funded accounts (all be it through the alleged guise of trading real currency).
False Advertising
This point is an interesting one. There is nothing illegal about prop firms making money from failed evaluation accounts, customers know the risk before they enter the agreement. What is different for MMF is again the way in which they chose to advertise their business model. We all know when we enter a casino that “the house always wins” the same is also true for prop firms, ultimately there will always be more failed traders than successful ones. The difference here is that MFF were explicitly implying on their website that they were on the side of little guy, that when you win, they win. When in reality they did not employ a trade copying service like Apex, they saw a funded trader as a danger to their profit model rather than another potential stream of income on top of the failed evaluation income. This sounds like a MFF problem and not an industry wide problem.
Funded Accounts being rerouted
This is a sticky one for MFF. Not only is spread betting (CFD) illegal in America but the use of a third party entity without the explicit knowledge of the customer is also illegal. This is possibly the most worrying piece of the case against them. There is no way of knowing if this is happening across the industry or not but is an outrageous thing to happen if true.
Again, whether or not this affects multiple prop firms is an impossible thing to know as an outsider.
MFF Drawdown Rules were in “bad faith”
The wording here is interesting, they are not being investigated for having a drawdown. But rather, the issue is against the fact that MFF were hoping for failed accounts and allegedly trying to find loopholes in order to close trader accounts. Drawdown rules themselves are not under the microscope here, but rather the ethos through which they are implemented.
From my perspective, I have never found Apex picking at loop holes in their rules. They are quite clear no news-gambling trades will be paid out, no algo-trades will be paid out, no accounts that make all their money on one day and then just do small trades until payday will get paid out. All these rules are setup to ensure that only the most consistent and successful traders get paid rather than those that yolo 20 contracts at the CPI data. For me, this makes sense.
What Happens Now, Pauli?
In my view guys, there a few things we need to keep in mind. Firstly, this will be a drawn out process as these things often are, so there is no risk of this becoming an industry wide closure of prop firms. That just won’t happen, there is no precedent for it.
Secondly, and to be honest most importantly, I think this is a good thing. Retail prop firms have grown exponentially over the last few years. There is little regulation that governs how they operate and with how much transparency they operate. What will 100% come out of all of this is regulation for this new area. And with regulation will come transparency this can only be a good thing. I think the reality is that prop firms will not get shut down, instead they will be given very clear expectations of how they must operate. This is good for everyone.
In life as well as in trading, I tread the middle path. I am neither a democrat or a republican. Neither left leaning or right. I am not a patriot as I know the sins of my own nation, nor am I some woke self loathing clown. There are people all over twitter over the last 24 hours proclaiming “SEE I TOLD YOU ALL THAT ALL THESE PROP FIRMS ARE A SCAM!” When the reality is that prop firms have been around as long as the stock market has been. Yes, I have no doubt that some of them, run by nefarious characters are no doubt a scam, whilst others are exactly what they say they are, a way for the little man to access the bigger markets such as futures and currency exchanges.
The truth is neither black nor white (neither is it the democratic blue or the republican red), often it is tinted by both colours from both sides. In this case too, I do not believe this is the end of prop trading, in the same way I don’t think the Ukraine war is the precursor to WW3. But those who enjoy existing at the extremes will continue to funnel their black and white view of the world.
For now, it is business as usual. The world continues to turn and we continue to learn and grow as day traders living the prop life.
Much love,
PW
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Most of the prop firms are shady and scam and really difficult to find out who is genuine.
Hi