Proprietary trading remained an institutional phenomenon until 2008 when a global financial crisis revamped the industry.
Commercial banks and other large financial entities were forced to give up on prop trading which essentially meant utilizing their internal capital for trading and investment activities.
The rise of private prop firms was largely driven by the demand for bigger gains and the democratization of trading technology available for brokers and retailers alike.
What Led to The Fall of the Prop Trading Industry?
The mushroom growth in the proprietary trading industry hasn’t been a sustainable one in the last few years though. But the fall has rather been dramatic and sudden.
Prop firms tried to adopt the niche of speculative and high-frequency trading when banks and financial institutions were forced to shun them.
The biggest challenge for prop firms comes through the changing regulatory landscape around the world. The US does not allow CFD trading and it’s a challenge for any broker to accept clients there.
Although proprietary firms are not involved in CFD trading directly and look to take advantage of the grey-area regulatory compliance requirements but it’s hard to convince regulators there.
Recently, the CFTC filed a complaint against the well-known prop firm My Forex Funds for a $310 million fine for compliance failure with leveraged trading and soliciting retail customers for different retail activities fraudulently.
My Forex Funds failed to comply with the regulatory requirements in the US set forth by the CFTC and in Canada by the OSC which ultimately led to authorities confiscating its assets and resulting in bankruptcy for the prop firm.
Another case of shutdown is the Funded Trader (TFT) which halted its operations last month. It has seen a growing number of clients withdrawing funds from its services but complaints for delayed payments from the firm are growing ever faster.
The Funded Trader’s fallout seems to be a conflict with the MetaQuote licensing issue as the company doesn’t allow accepting clients from the US. TFT uses a third-party broker to provide services to its clients like many other prop firms.
MetaQuotes has recently been active against firms taking advantage of the grey-area licensing compliance framework and we could see more prop firms falling out to the same licensing challenge in the coming months.
How Prop Trading Firms Can Weather the Storm of New Regulatory Requirements?
Regulatory compliance remains the biggest concern for proprietary firms around the world. Many prop firms in the EU region are considering relocation or abandoning operations at all, due to sterner regulatory requirements.
A recent Acuiti survey revealed around 50% of the prop firms (designated as Class 2) under the newly imposed Investment Firm Prudential Regime (IFR/D) rules are considering relocation outside the EU zone.
54% of prop firms say the time taken to develop skilled traders is their biggest challenge, 50% say regulatory pressure, 46% cite costs from exchanges, and a whopping 43% find shortage of skilled staff their biggest challenge in the prop-trading industry, according to an Avelacom survey.
The proprietary trading landscape is under immense pressure with the increased burden of new regulations, lack of skilled staff, lack of trust from investors, and challenges to find innovative solutions to their current problems.
However, this creates an opportunity for prop firms vying to provide quality services and advocating innovative regulatory changes to clear the dust in an already muddy environment in the prop industry.