Prop Firms, A New Solution to Capital Deprivation? (Part 3)
Have Prop Firms Come to Stay
Since the launch of FTMO, a lot of other prop firms have risen to take a share in the market and the past years have seen a lot of questionable prop firms with weird models and “Too good to be True” rules for attracting traders to trade for and with them.
This has resulted in a lot of failures and close down of these prop firms as problems arise from their inability to pay out traders who have crossed over to their funded phase, it turned out that their attempt at attracting customers made them turn a blind eye to the possibility of their rules being too easy that anyone who has access to them can easily pass the challenges and make so much money that they are unable to pay.
I want to take a deep dive into some failed prop firms and point out some of the reasons for their eventual failure, how other prop firms can avoid these pitfalls, and how traders can be guided to not fall victim to these prop firms with shaky, sneaky business models.
Failed Prop-Firms
Fair enough, some prop firms have tried but failed due to their ignorance, and over-sight of the day-to-day operations of the business, but some are just full-blown frauds who make their money off the failure of traders who sign up with them and close down once they have their fill, under the disguise of operational failure. It is important to know the difference but still very key to know the obvious themes of these prop-firms with shaky or sneaky business models.
I will be talking about two prop firms that have proven to be a failure in the trading industry, one with a sneaky failure and the other with a severe operational failure. These prop firms are none other than MY Forex Funds (MFF) and Consummate Traders.
My Forex Funds Failure (MFF)
Despite being a leader alongside FTMO in the prop-firm industry, MFF failed, and their failure also questionable business model is outlined under these following points.
B-Booking Clients: Essentially B-Booking is when a prop-firm or brokerage does not send the open positions of the trader to the live market, essentially keeping it within their firm and this makes sure that when a trader loses money the firm makes money, which is essentially a conflict of interest as a prop-firm that practices this type of thing will cheat the traders for the traders to not win trading against them. Because of this type of practice, they will start to:
- Cause Enormous slippage: They will not fill a trader at a price level which he determined to enter causing more loss than pre-intended, this gives the prop-firm more money when a trader loses a trade and also takes a trader out far worse than his pre-determined loss, which is a profit maximization strategy of B-Booking firms.
- Misrepresentation of commission: They will start to charge more commission than shown on the spreads, widening the spreads as soon as a trader takes a trade. These are characteristics and actions of a prop firm that is involved in the B-Booking business model. This is essentially a Ponzi scheme as the traders who win are being paid not by the prop firm through profits made from the liquid market, but through fees paid by new traders that sign up with the firm.
- Halting Pay-Outs: MFF was accused of delaying pay-outs of traders who have made profits, and this is essentially a tell-tell sign of a Ponzi scheme as payments can’t be made unless there are new deposits, they were called out on different social media platforms by traders who were victims of this prevalent issue, and this started raising high-brows on their legitimacy.
CFTC Investigation
This caused them to be investigated by the Commodities Futures Trading Commission (CFTC) and they were guilty of violation of the Commodity Exchange Act (ACT), 7 U.S.C 1-26 and accompanying Commission Regulations (“Regulation”), 17 C.F.R pts 1-190 (2022).
They essentially were a Canadian organization called “Traders Global Canada” which engaged in a large-scale fraud scheme involving leveraged, margined, or financed retail foreign exchange (“retail forex”), under the guise of My Forex Funds (MFF) posing as a third party to liquidity providers which they were not and it was discovered that they were a fraud and were a counter-party to all customer trades.
They failed as a result of them not being able to run their Ponzi scheme anymore as the concern about their legitimacy grew. A lot of traders about (135,000) had signed up with them generating a tune of $310 million in fees.
In conclusion, to deceive customers and pose as if they pay out, they have to collect more fees than they give to pay-out traders that have profited using various means like:
- Using a drawdown limit as a bad-faith pretext to terminate customer accounts.
- Sending orders from an extremely small number of successful customers to an overseas counterparty, then using specialized software to artificially increase the distance between the best bid or offer.
- Misleading advertising. These were the charges among many others after they were investigated
Consummate Traders Failure
This is a prop firm managed by a brokerage called Kwakol Markets Pty. Limited, the back story of this firm is that it was first fronted to Africans especially Nigerians to be owned by two very influential traders in Nigeria, who have a really large following and community of traders that do what they say.
The perception was that these two influential Nigeria traders owned the prop-firm, but when eyebrows were raised concerning issues surrounding the prop-firm about pay-out and their sneaky slippage activity were voiced out by hundreds of Africans, this two came out publicly and dissolved the relationship with the prop-firm. What is fishy about this matter is the fact that they made it out to seem that they were the founder and co-founder of this prop firm but later resigned which is kind of misleading.
Although consummate traders have not fully made publicly their dissolution from the prop-firm industry, it just goes to show how fickle their operations are and how failure to keep things in order, these are the signs of a prop-firm that can’t be trusted and as a result, traders must be careful.
There is not much material as to their operational problems except for the cry out from traders about delayed pay-outs, Trades being opened without the knowledge of the trader, and some fishy slippages, but be on the lookout for any public statement.
In conclusion, before the collapse or failure of any prop firms, there are always signs of the illegitimacy or fickle structure of their business models and this can be found in how their rules are communicated. The saying “if it is too good to be true, it probably is” can’t be truer in this sort of situation.
Things to Look Out for and Avoid When Choosing a Prop-Firm
Unrealistically low-profit targets
Some prop-firms might come out and say their phase 1 targets are 3% just to attract customer traders, it is important to note that this sort of prop-firms even though they might think to themselves that they are legit at the start, they will eventually crumble due to the level of difficulty of their challenge. A lot of traders will pass the challenges easily and request pay-outs, at a point the pay-outs will surpass the challenge fee, and most likely they are B-Booking, will find it difficult to pay traders and they will dissolve sooner than later. So, beware of this sort of outlandish rule.
Very low challenge fee
Some prop firms use low fees to attract customers who cannot afford the fees of the more accredited firms, they use this to lure traders to sign up with them. The disadvantage of this sort of character is the possibility that they are just running a Ponzi scheme and not a prop firm that has the interest of its traders at heart, this is also a suspecting sign of a fake prop firm or a firm with a fickle structure.
No Down limits
This is no different from my number one point when a prop firm sets a very low-profit target, this is also a luring tactic that is used by a lot of these untruthful firms and you should watch out for any firm that claims this in their rules as it won’t be long till they fold, just like any Ponzi scheme.
Not limited to this list but the above are the most common luring tactics these fickle firms use to draw in unsuspecting customer traders.
At the end of the day, it will be incomplete if there is no accolade given to the firms that have proven to be true industry giants and props with a strong and focused business model, these firms have been tested over time and also a track record beyond its competitors, this brings me to my next topic, “Thriving Prop-Firms”.
Thriving Prop-Firms
Amidst the mistrust and uncertainty around the prop-firm industry, there is no doubt a few of them are doing well and so far, thriving, these prop-firms have been tested by time and also no un-usual fud around them, although they are not perfect and also prone to failure, they have shown competence for a good period and kept their word.
The only prop firm without unnecessary fud about them is no other than: FTMO
Disclaimer: Everything I am about to say about this firm is strictly due to my perspective and experience with them and I am in no way affiliated, nor have I been paid to talk about them. Kindly do your research before committing financially to any of the above-mentioned firms.
FTMO
FTMO which is an industry leader in the prop space has been around since 2014 and was launched internationally as far back as 2015 actively which is about 10 years in the game, it is no doubt the longest standing prop-firm and the pioneer of the modern prop-firm industry. There is no doubt that the success of the traders is also theirs which says a lot about their business model, there have not been widespread complaints about any hanky-panky, and this has ever since boosted their reputation as a giant in the prop-firm space.
FTMO’s Trust Pilot rating sits at a whooping 5-star review. Of the over 9,550 people who rate them on the trust pilot site, 8,881 give them a 5-star rating, which is 93% of 100%. This is truly remarkable as the firm has gone to defy the odds and has proven itself to be reliable, stats don’t lie.
Data as of 2021 states that FTMO had a remarkable 23 million dollars paid out to traders, with over 6 million trades opened each month and an average payout processing time of about 8 hours. These are truly remarkable stats as of then.
FTMO has their phases divided into 3 with 2 of the phases being the evaluation phase, the first phase being the challenge phase where you need to make a 10% profit within 30 days and the second phase called the verification phase where you are required to make a 5% profit target within 60 days. One remarkable thing about FTMO is that they pay back your challenge fee with your first profit split after becoming a funded trader.
For more information, visit their websites for details, as I am only picking out the materials important for this discussion purpose.
Things to Look Out for and Consider When Choosing a Prop-Firm
Trust Pilot Rating
The Trust pilot is an independent website that allows customers to review businesses and services online. To measure the overall satisfaction of the reviewer’s trust pilot has a trust scorecard card of up to 5 stars and allows a group of people based on the percentage that has chosen a particular star rating to determine how a company is doing on a rate of 1 to 5-stars, the more the percentage of people who pick a particular star rating, the more it is a real representation of the businesses integrity. In other words, you want your prop firm to be rated high on the trust pilot website.
Stick with Industry Giants
To be on the safer side as a first-timer in the prop-firm space, it is important to stick with the guys who are talked about the most as these have a name and reputation to keep and there won’t be any un-usual fud around them when you have gained experience with this one’s only then can you risk going for the shinier ones as you have made profits and won’t mind taking a chance on the ones with seemingly better and attractive terms.
Stay Conversant on Twitter
Amidst all the noise, there are gems shared in the form of advice on Twitter, believe it or not, experienced traders give out their opinions daily and sometimes some talk about their experiences with prop-firms and this is a good source of information where you can start to do your research and gather data about your choice of prop-firm.
Not limited to this but these are some of the things that you should look out for when in search of a proper prop-firm to trade with.
In conclusion, FTMO is my personal first choice whenever I want a funded account, and I truly believe in their business model. And whether prop firms have come to stay even with the uncertainty around the industry, this firm has shown commitment and vision when it comes to providing traders with significant amount of capital in a Win-Win environment.
That will be all for this section, till next time Stay Safe!
