Are shady prop firms taking advantage of traders? Understand their tactics and how to avoid these fraudulent firms.
In the world of trading, access to large sums of capital is the proverbial Holy Grail. Prop firms provide traders with an opportunity to access huge capital when they pass a challenge, or a so-called test. But what if those opportunities are not what they are cracked up to be? Some of the more shady prop firms have built systems that hurt traders more than it helps — often without traders knowing that anything is wrong.
Those firms may look professional, if not even trustworthy, but they work on business models oriented to their profits, not on the ones to make traders succeed. With fewer cents in the dollar forex or futures market, the opportunity for shady prop firms is compounded by the rapid influx of millennials and Gen Z traders looking for shortcut growth opportunities.
Prop firms (which is shorthand for proprietary trading firm) allow traders to trade using firm capital. The best traders share the profit with the firm, and the skilled trader gets huge amounts of capital they would not have had access to.
It used to be that prop trading was above-board. Elite traders would get hired by banks or financial institutions to trade with capital from the bank’s proprietary desks. The trader and firm contributed to the system, as did the investors. It was a win-win scenario.
Now, jump to the present day and see how online prop firms have changed the game. A lot of legit firms still remain, but the shady prop firms start showing up everywhere, burying you with a promise of the world but actually providing much less.
A shady prop firm’s business model is one of the clearest signs of a shady prop firm. Rather, they profit based on trader failure, not trader success, not the opposite.
Let’s break this down:
For instance, let’s take an example when you pay a fee of like $500 to pass a trading test when you enroll in a prop firm challenge. It says it is a test of your talent and whether you can manage a funded account. However, what if you do not pass? You walk away with nothing, and the firm keeps your $500.
When it comes to shady prop firms, the numbers speak for themselves. These companies also understand that most traders who attempt their tests will fail them — some, in fact, because the tests are designed to fail you. That is, for every 100 traders that fork out $500, the firm rakes in $50,000. The firm might pay out $5,000 each time for the 2% that succeed — that total payout of $10,000 leaves $40,000 profit.
It encourages shady prop firms to make sure you fail. Well, the more traders they lose money, the more they gain.
And if failing tests wasn’t enough, some dodgy prop firms will apply tools like the Virtual Dealer Plugin to throw traders off. Disclosure: A tiny bit of code that plays with how trades are made, making traders frequently lose money in a fraudulent way.
Here’s how it works:
In other words, these companies game the backend so they will always come out on top when you lose. Traders often do not even know that this is a direct conflict of interest.
So shady prop firms set up like that. This boasts attractive websites, high payouts, and great reviews. A lot of traders are excited to take advantage of it and do not look further.
The truth is much less glamorous. These firms also can keep you in demo accounts, where trades are not even tied to real markets. You think you are trading with live capital, but you are not.
Additionally, suspicious prop companies usually lack sufficient regulation. They do not fall under the definition of regulated brokers, and as a result, they have the ability to manipulate rules to their own advantage without any repercussions.
Deciding to join a sketchy prop firm is not only expensive for the trader, but it can also be emotionally draining. Traders burnt out and frustrated from being manipulated, or caught in an unfair system, always have a reason to lose money.
Even worse, it damages industry reputation. Others may be capable of trade-winning if they only possess the right tools and an opportunity to trade, but those traders tend to sit on the sidelines, believing the game is eternally rigged against them – and in the case of shady prop firms, it often is.
Whilst the risks are true, not every prop firm is bad. There are a few firms that will want to help you strengthen your trading career as well as have transparency. Here’s some warning signs to pay attention to:
To new traders, prop firms may appear to be the greenlight to fast funding. However, due diligence is key in any opportunity. There are prop firms that are less than trustworthy — you may not even realise it until the damage is done, but they are draining your funds and enthusiasm with their hidden fees.
At the end of the day, trading is challenging enough without fighting unjust systems. Traders could do with a few breaks, but on the side that rewards skill rather than trying to screw up. And firms: Play fair! Staying away from shady prop firms is not only about saving your money, it is also about saving your potential to succeed.
