Opinion: The Future of Funded Trader Firms Regulations – Q2 2024

6 min read

When do you think regulation on prop trading will be introduced?

Prop trading isn’t new—it’s been a staple in institutional trading for decades. What’s changed in the retail space is the automation of risk management and trader assessments, along with the gamification and growth of online communities.

Regulation is coming, but the details are still up in the air. It’s going to be tricky due to the global nature of prop trading. We don’t even know which part of the government will handle it—financial, gaming, or another branch. Prop trading might fit better under gaming and gambling laws than financial regulations due to its fast pace.

Guidelines might come from financial regulators or other bodies like the Ministry of Finance, Ministry of Sports, or the FTC.

Already we see a wide array of different methods evaluation firms use to define their operations, challenges, and funded accounts. For example, for funded accounts, some provide actual live accounts; some provide another demo account, and others structure such as accounts for providing the prop firm signals. Future regulations will need to cover all these bases.

What are some appropriate regulatory steps for prop trading? Where can regulators press prop trading?

Challenge rules 

One big issue is the rules for passing or failing challenges—they can be easily manipulated. Firms benefit when traders fail. Some rules are clear (like drawdown, daily drawdown, and target limits), but others are not clearly defined and are based on the discretion of the prop firm. Although these challenge accounts determine which traders can supposedly trade on the prop firms’ capital, and therefore firms should have some control over this, standardizing these rules would help.


Another key area is enforcing payouts. Regulators need to ensure firms have structured payouts, even if they face financial trouble. This might involve segregating payout funds from other business funds. Clear rules on payout timelines are also necessary.

These two areas are the most important but would create a huge workload for any regulator; they would need an army of investigators. 

Because trading has essentially now been gamified, people don’t like losing. Imagine the amount of complaints the regulator would receive, even if the prop firm was operating fairly. The regulator may need to investigate every case where an account was deemed to breach the rules of the challenges or payouts. Without every prop firm working in the same way this would never work. Even with standardization, it’s hard to imagine how this would be feasible —it would certainly make the license fee very high.

Misguided campaigns

Regulating misleading ‘get rich quick’ campaigns is also crucial. Appropriateness tests could help. Just like brokers ensure only ‘pro’ traders access complex derivatives, funded traders should prove they understand the instruments they trade.


Another consideration is the model the prop firms use in reality: are the funded traders actually trading live accounts, or are they just given another demo/B-book account? Firms may need to declare this and make it transparent, meaning that the rules/licenses needed could be different, as they both have different risks.

Do you see any changes around demo account trading? Will trading platform vendors tweak their offering if regulations curb some services?

If prop trading as we know it survives, I believe most platform providers will introduce new account types to differentiate between those who took the challenge, those who run funded accounts, regular demo/practice accounts, real/live accounts etc. This distinction will facilitate clearer reporting and enhance risk management in the dealing room. 

When you onboard a prop trading firm now, after the initial due diligence, do you check the business practices of prop trading clients? Or is it just a one-time thing?

Devexperts’ initial KYB process was designed for regulated brokers, exchanges, and wealth management firms. With the rise of prop firms, the DXtrade team has recognized the need for ongoing vigilance. We now extend due diligence beyond onboarding to continuously monitor our clients’ business practices and manage potential risks dynamically.

When regulators prepare for regulations, do they consult with tech providers?

Regulators usually consult tech providers and industry stakeholders when drafting new rules. Although we haven’t been approached yet regarding prop trading regulations, we’re ready and willing to collaborate. Devexperts’ expertise can help create practical rules that support market stability and innovation. We look forward to any opportunities to assist regulators in understanding this niche.

What do you see as the future of prop trading?

Different regions are showing different trends. Futures are on the rise in the US, while FX and CFDs remain strong in Asia. 

The new generation of traders like the way prop trading works and will continue to operate this way. The amount they are risking is clear (the challenge account fee), the trading is very social with lots of engagement on Discord and X, and they feel part of a community.

Prop firms have been able to interact with their traders, generate interest, and retain customers in ways a retail FX broker would only dream of being able to do.

Traditional brokers like IC Markets, AXI, Oanda, and Hantec are entering the prop trading space. This is good for the industry and traders because these established, regulated firms have more to lose if they don’t follow the rules. They also know how to run brokerages well.

The bottom line being that prop trading isn’t going anywhere and will continue to grow, branching out into different shapes and sizes to cater to these differing demands.