Regulators have recently turned their attention to proprietary trading firms, commonly known as prop trading firms, as the industry continues to grow and evolve. Prop trading involves firms using their own capital to trade, aiming to strengthen their balance sheets. This practice, which dates back to the 1980s, has transformed from traditional brick-and-mortar setups to online platforms accessible to both novice and sophisticated traders.
The prop trading market is now a multi-billion-dollar industry with a compound annual growth rate (CAGR) of 4.2% from 2018 to 2021. Prop traders play a crucial role in providing liquidity, efficiency, and price stability to markets, facilitating smoother trading operations for all participants. Unlike traditional traders, prop traders do not use clients' capital but rather the capital of the institutions that employ them, such as hedge funds and investment banks.
However, prop traders have a history of making high-risk bets with significant leverage, which drew regulatory attention, especially after the 2008 financial crisis. The introduction of policies like the Dodd-Frank Act and the Volcker Rule aimed to curb risky trading activities by banks. This led to the rise of independent prop trading firms, which are not subject to the same stringent regulations as their larger counterparts.
Recently, regulators have shown increased interest in the prop trading industry, particularly as trader-funded firms gain popularity and influence. This scrutiny intensified in 2023 when the Commodity Futures Trading Commission (CFTC) and Canadian regulators charged My Forex Funds with fraud. According to Finance Magnates, the European Securities and Markets Authority (ESMA) is now examining prop trading firms and engaging with stakeholders to determine what greater oversight might entail. These discussions are occurring in both Europe and the United States, with industry participants anticipating more regulations.
Regulation of prop trading varies by jurisdiction but generally includes adherence to consumer and data protection laws, as well as financial and trading regulations. For example, funded traders operate with the firm's capital and must be classified appropriately as either independent contractors or employees. Prop trading firms must also comply with anti-money laundering (AML) and know-your-customer (KYC) requirements to ensure the legitimacy of traders.
In Singapore, prop trading is not governed by the Singapore Securities and Futures Act 2001, but firms like PipFarm voluntarily follow consumer protection regulations such as the Singapore Consumer Protection (Fair Trading) Act 2003.
Proponents of tighter regulation argue that it would help eliminate bad actors from the industry, provide clearer dispute resolution processes, and increase transparency and investor confidence. Regulation could also change the treatment of capital, potentially allowing outside investors to fund prop trading firms and imposing limits on how firms can use available capital.
However, critics warn that excessive regulation could harm independent prop trading firms that lack the financial backing of larger institutions. High licensing fees and stringent risk management requirements could reduce the capital available to traders and potentially drive firms to relocate to more lenient jurisdictions, as seen in the contracts for difference (CFD) trading industry.
PipFarm offers a secure trading platform for forex traders, emphasizing risk management and sustainability. Their cTrader platform is designed for stability and user-friendliness, making it accessible to traders of all levels. By prioritizing the trader experience, PipFarm aims to attract traders seeking a reliable and supportive trading environment.
