135,000 Fall for New Scam! Proprietary Trading Firms Become Fraudsters' New Favorite

The emerging proprietary trading space has come under significant market scrutiny recently with the launch of fraud allegations and investigations by the US regulator into globally recognized prop firm My Forex Funds. My Forex Funds has stopped all services, with all accounts and withdrawals being affected and suspended, including those being assessed or those that have passed the assessment and are waiting for a share of the profits. And 135,000 registered users across the globe who have paid at least $310 million are involved.

^{(Picture1:CFTC public announcements)}

Prop firms are the main body of "proprietary" trading, where they provide traders with capital to trade in the live market, claiming to help reduce their clients' investment losses. The firms share the profits of their trades with the trader, sometimes by as much as 90 percent. It looks good but requires traders to follow some rules.

Traders are required to pay the proprietary trading firm to meet trading challenges. They are allowed to use the funds provided by the firms only when the challenges are completed. And this is not the only condition. Some firms even chage a monthly fee for trading "props". While proprietary trading firms appear to be glamorous, fair, and transparent, there are many grey spaces behind them that provide a breeding ground for fraud.

Differences between Forex brokers and proprietary trading firms

As we all know, a foreign exchange broker is where an investor deposits one's own funds into an account, and the risk and the profit are on his/her own. The proprietary trading company, on the other hand, is very different from the broker. The differences between the two are shown in Table 1.

^{(Table 1: Differences between Forex brokers and proprietary trading firms)}

Regulatory loopholes behind proprietary trading firms

Most proprietary trading firms are unregulated because the firms deploy their own funds, not those of traders', which allows them to avoid most regulation. They only provide liquidity and execute orders from other brokers. And they often insist that they are not financial institutions and do not provide financial services.

Some regulators believe that proprietary trading companies are controversial and do not rule out the possibility of introducing relevant regulatory legislation for Forex proprietary trading firms in the future. At present, most proprietary trading firms have successfully avoided regulation, which makes it easy to produce Ponzi schemes in this situation. Many prop firms often promote aggressive marketing strategies and induce investors to believe that they can participate in the Forex market in the capacity of a professional trader with high amounts of money for trading, making the business show explosive growth.

Take the proprietary trading firm Leveled Up Society, it promises to provide up to $200,000 in funding in two phases for traders who can meet the trading "challenge." It also offers a profit share of up to 80-85%. According to information from the Internet, as of August this year, the association has 76,403 members, and paid $1.9 million in expenses, with an average per capita expenditure of $7,000. However, people can't help but still worry about the safety of the money behind this.

Prominent investment risks with proprietary firms 

Based on the above, taking the CFTC's allegations against "My Forex Funds," which employed fraudulent practices to solicit clients for leveraged trading, margin deposits, or financing for retail forex trading, along with cases of leveraged retail commodity trading, we analyze various risk factors associated with proprietary trading firms according to their features:

Commit Fraud and Conceal Actual Counterparty

According to the CFTC's charges against "My Forex Funds," the company claimed to provide clients with the opportunity to become "professional traders," trading with third-party "liquidity providers" by using funds from Traders Global and sharing trading profits. The company also assured clients that "your success is our business" and "we only make money when you profit." However, in reality, Traders Global, instead of third-party "liquidity providers," acted as the counterparty for almost all client trades.

Traders Global executed orders from the most successful traders through STP accounts, where orders are handled by genuine overseas liquidity providers, while the majority of orders were executed in a non-STP manner, allowing the platform to manipulate accounts. It's important to note that Traders Global does not hold a proper license, and its trading environment is subject to manual manipulation, posing increased risk to traders, which made it a classic Ponzi scheme. 

^{(Picture 2: CFTC Charge Document Cover)}

Use Software to Diminish User Profits

One of the unethical practices employed by My Forex Funds involves the secret use of specialized software to manipulate client orders, executing them at prices lower or higher than what is displayed when the orders are placed. This results in customers incurring additional losses without their knowledge. For more successful traders, as their profits increase, so does the size of slippage on their accounts, and order execution times will be longer to deter large withdrawals, ultimately cutting customers' profits and increasing their losses.

Unjust Commission Charges

My Forex Funds charges a trading commission fee of $3 per lot, which makes sense since it claims that Traders Global is a liquidity provider that warrants commission fees. However, given that Traders Global is not an actual liquidity provider, these commissions are unnecessary. It's estimated that My Forex Funds profited approximately $7 million from commission fees.

Fabricate Reasons for Arbitrary Account Termination

My Forex Funds was accused of terminating customer accounts under false pretenses, such as alleging customers violated platform trading rules, however, in reality, customers did not breach any trading terms. My Forex Funds entirely adopted the consistent unethical practices of shady platforms, victimizing users.

Conclusion

Proprietary trading firms, despite being an emerging market, are susceptible to exploitation by fraudulent platforms due to the absence of industry regulation. Many of the traders attracted to proprietary trading firms are novices who are the most targeted "prey" for scam artists. There is a possibility that fraudsters may disguise themselves as proprietary trading firms to attract novices and then carry out systematic fraud. Investors are advised to stay vigilant, exercise caution, and prevent financial losses by avoiding such fraudulent proprietary firms like "My Forex Funds."