Are Online Forex Brokers Endangered by Prop Firms?

FinanceFeeds Editorial Team

Proprietary trading firms of yore are no longer in vogue. Online scouting companies have usurped the prop firm moniker.

Nowadays, traders who learn about Forex no longer aim to deposit $10,000 of their own money, they prefer beating the challenge and getting a $100,000 funded account instead.

The number of prop firms is growing faster than before. While there were only a handful just a year ago, their number is closer to one hundred now.

The main advantages that prospective funded traders a looking for when choosing a prop firm over a retail Forex broker are:

  • Large trading capital with limited risk and without the need to invest a large amount of their own funds.
  • High leverage even in jurisdictions with heavy regulatory restrictions (USA, EU).
  • A larger variety of assets (for example, CFDs for US traders).
  • Better execution as most prop firms operate demo accounts.
  • Genuine support with education and strategies provided by prop firms.

Given the perceived ease of accessing trading capital by funded traders, the traditional brokerage model is in clear danger of being pushed out of the industry. However, this doesn’t seem likely in the near term.

Retail brokers still remain popular, with many of them beating their monthly trading turnover volumes. And new brokers too continue to appear almost on a daily basis. There are factors that still work in the classic Forex brokers’ favor:

  • Big traders have their own money to trade and are loath to share their trading profits with prop firms. At the same time, large capital traders are brokers’ favorite customers as they come with the best expense/value ratio.
  • Regulatory protection of prop firm’s customers is questionable. It would be much harder to dispute some execution blunder or mispricing for prop firm’s clients.
  • A looming regulatory clampdown may serve as a deterrent to prospective funded traders. What’s the point paying for evaluation if the prop firm will close down due to some new regulation?
  • Funded traders’ profits are taxed differently — for example, they cannot benefit from the spread betting taxation mode in the UK.
  • Brokers rarely force any rules their clients have to trade by. Yes, there can be restrictions on scalping, expert advisors, or a large flow of orders, but that’s hardly comparable to the large set of rigid rules set by prop firms.

If nothing changes from a regulatory standpoint, the current situation in the industry will progress to a stronger division between “large” traders (who will lean towards personal trading accounts) and “small” traders (who will opt for funded accounts). Some traditional brokers may also decide to branch out into prop firm model. Though it will probably be difficult for them to separate the brands and satisfy regulators.

To conclude, it is hardly evident right now that prop firms will dangerously disrupt the online brokerage industry. At the same time, brokers who cater to small account traders might be in a greater peril than others. That being said, financial regulators could come up with some unexpected “creative solution” that would lay waste the prop firm industry, or both to it and to brokerages.

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