In response, it should be said that the nature of prop trading is inherently legal. In this process, a company or financial institution uses its own capital to buy and sell assets. While prop trading can be a profitable opportunity for experienced traders, unfortunately, like any other activity, this field is also susceptible to scams and exploitation by opportunistic individuals.
In 2008, major banks and investment firms were held responsible for the global financial crisis. Many suspicious transactions at that time were carried out by prop firms, leading to the collapse of the entire financial market and resulting in the loss of billions of dollars and even lives. It was after this event that the Volcker Rule was implemented to prevent history from repeating itself, ensuring that banks and other financial institutions could no longer operate prop firms as they had in the past. As a result, the majority of these firms ceased all prop trading activities.
Unfortunately, the history of scams in the prop firm sector, like in other investment fields, is not without examples. In recent years, there have been numerous cases of fraud in this area, resulting in significant losses for unsuspecting investors.
Some common fraud methods in prop firms include:
Creation of Fake Prop Firms : Scammers may create fake websites and provide false information to present themselves as legitimate prop firms, collecting investors' money in the process.
Unrealistic Promises : Fraudsters may offer guarantees of risk free profits to entice investors to invest in their prop firms.
Concealing Fees and Charges : Fraudsters may fail to fully disclose the actual fees and charges associated with investing in a prop firm to investors.
Manipulation of Trades : Fraudsters may manipulate trades within the prop firm to increase investors' losses and boost their own profits.
Lack of Transparency : Fraudsters may not provide the necessary transparency about the prop firm’s performance and how investors' capital is managed.
Difficulty in Withdrawing Profits : Fraudsters may create obstacles or complications when investors try to withdraw their profits from the prop firm.
In addition to the above, some statistics also highlight the prevalence of fraud in this sector:
U.S. Commodity Futures Trading Commission (CFTC) : According to a CFTC report, more than $600 million was stolen from U.S. investors through prop trading related scams in the first half of 2023. This represents a 20% increase compared to the same period in 2022.
CFA Institute Research : According to research by the CFA Institute, in 2023, approximately 65% of investors in prop trading experienced partial or total loss of their capital.
Therefore, before investing in a prop firm, it is essential to conduct thorough research and proceed with caution. Remember that no investment is risk free, and high returns always come with corresponding risks.
Also, before entering this field, you must fully understand the risk nature of financial markets and only invest excess capital in trades. If you're looking for an opportunity to enter the exciting and profitable financial markets, Fenefx Prop Trading will be the best option for you. By taking advantage of this platform's benefits, you can achieve significant earnings without needing initial capital, relying solely on your knowledge and skills.
Prop trading can be an exciting career path for traders. However, selecting a reputable company to ensure a safe and successful experience is crucial. Below, we will outline key factors to consider when evaluating different prop trading firms.
The first and most important step is to thoroughly check the history and reputation of the prop firm. Look for firms with a good track record and a positive reputation in the field. Verify whether they have the necessary licenses from the relevant financial authorities in the country.
Before signing any agreement with a prop firm, carefully and thoroughly read the terms and conditions. The contract should clearly and explicitly address aspects such as profit sharing structure, fees, potential risks, and trading rules. Ambiguity and complexity in the contract can be a sign of dishonesty on the part of the firm. Never sign a contract without fully understanding its terms. If necessary, consult a legal advisor to review the contract.
Before starting, familiarize yourself with the prop firm's trading conditions in detail. These conditions include items such as the minimum tradeable capital, the trading platform used, allowable leverage, approved trading strategies, and any potential trading restrictions. Ensure that you are comfortable with the trading conditions and that they align with your personal trading strategy.
A reputable prop firm values the education and skill development of its traders. They may offer free or paid courses in areas like technical analysis, risk management, and trading psychology. Additionally, having strong support services to address traders' questions and solve potential problems is a sign of a professional prop firm.
Today, the internet is a vast source of information. By searching online, you can find reviews and experiences from other traders regarding various prop firms. Reading these reviews helps you get a general sense of the firm’s performance and reputation. However, remember to always approach online information with a critical perspective.
Along with the benefits of prop trading, there are also risks that could threaten the stability of financial markets and the interests of investors. For this reason, various laws and regulations have been established to oversee these types of activities.
Below, we will examine some of the important regulations related to prop trading and their objectives:
Objective : To prevent U.S. banks from engaging in prop trading activities to protect customer deposits and ensure the stability of the banking system.
History : This rule was implemented after the 2008 financial crisis as part of the Dodd Frank Wall Street Reform and Consumer Protection Act.
Impact : The rule has significantly restricted prop trading activities among U.S. banks.
Objective : To regulate financial markets in the European Union and protect investors.
Scope : This law includes reporting and transparency requirements for prop trading firms, rules for best execution of trades, and limitations on high risk trades such as high frequency trading (HFT).
Impact : This law has helped increase transparency and oversight of prop trading activities within the EU.
Regulatory Bodies : The U.S. Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) oversee the activities of prop firms in the United States.
Objectives : To ensure that prop firms operate within the legal framework, maintain market stability, and protect investors.
Actions : These bodies oversee prop firms through periodic inspections, licensing, and imposing penalties in case of violations.
Requirements : Prop firms are required to develop and implement a compliance risk management framework.
Scope : This framework should include monitoring of trades, management of existing risks, and ensuring that the firm’s structure and operations comply with applicable laws and regulations.
Objective : To ensure that prop firms are fully and effectively compliant with the relevant laws and regulations.
There are ambiguities and challenges regarding the legal status of prop trading in Iran, which we will address below.
Lack of Specific Law :
Currently, there is no specific law governing prop trading activities in Iran. This means that companies providing these services are not under the direct supervision of any authority.
Legal Gaps :
The ambiguity surrounding which section of the commercial law prop trading falls under is one of the challenges ahead. This can complicate the protection of traders' rights and the definition of companies' responsibilities.
Risk of Fraud :
In the absence of unified laws, oversight, and transparency, the likelihood of fraudulent companies emerging increases. It is essential for traders to be aware of this risk.
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Prop trading companies provide an ideal platform for traders who want to engage in financial markets using the capital of a financial institution. If, as a trader, you are looking to receive capital from a prop firm, it is necessary to meet certain conditions and requirements. In this article, we will explore some of the most important conditions for receiving capital from prop firms.
Having a Successful Trading History
One of the most important conditions that prop trading companies consider when granting capital to traders is having a successful trading history. Prop firms often prefer to work with traders who have at least one to two years of profitable trading experience. Before applying for capital, you will need to provide documents and evidence that demonstrate your trading success over a specific time period.
Passing Evaluation Tests
Many prop firms use evaluation tests to assess the skills and knowledge of traders. These tests may include theoretical questions, risk management assessments, psychological tests, and market simulation scenarios. Passing these tests is essential for receiving capital from prop firms.
Commitment to Risk Management Rules
Prop firms impose specific rules and limitations for risk management. For example, they may set a maximum daily or monthly loss limit for each trader. Adhering to these rules is necessary to protect the firm’s capital and maintain a working relationship with traders.
Allocating a Share of Profits to the Prop Firm
In exchange for providing capital to traders, prop firms take a share of the profits from the trades. The percentage of this share varies depending on the firm and the amount of capital allocated. It is essential to understand this aspect and agree upon it before starting a partnership.
Understanding the methods for depositing and withdrawing funds in each prop firm is crucial for financial planning and proper capital management. Below, we will review the most common deposit and withdrawal methods in prop trading.
Bank Transfer (Wire Transfer) : The most common method of withdrawing profits is through a bank transfer to the trader’s account.
Cryptocurrencies : If supported by the company, withdrawing profits via cryptocurrencies may be preferred by some traders.
Electronic Payment Systems : Some prop firms use global payment gateways like PayPal for transferring funds.
Common Profit Sharing Models
Fixed Division : The simplest and most common method is a fixed agreed upon percentage. For example, after deducting losses and expenses, the trader receives 80% of the net profit, and 20% goes to the prop trading company.
Progressive Scale : In this method, the profit sharing ratio increases as the trader’s profitability grows. This creates more incentive for better performance. For example:
Up to 1 million Toman profit: 70% 30% division (for the trader and the company, respectively)
Above 1 million Toman: 80% 20% division
Drawdown Model : In this model, if the trader incurs a loss, the profits from future trades will first go to the company until the previous loss is recovered. This method places higher risk on the trader.
Important Points in Profit Sharing
Transparency : Reputable companies clearly outline the profit sharing rules. Make sure you fully understand the terms you agree to before starting a partnership.
Fees : Some companies charge fees such as subscription fees, trading platform costs, or commissions. Before starting, be aware of any deductions that may affect your final profit.
Fairness : The profit sharing terms should be fair to both parties, incentivizing the trader to maximize their profits.
