Summary:
Importance of Prop Firm Compliance
Regulated prop firms ensure fairness, transparency, and reduced risks for traders, while unregulated firms may lead to financial losses and operational disruptions. Prioritize compliance, track records, and clear payout policies when selecting a prop firm.
Main Points:
- Regulated Firms: Follow laws for fair and reliable trading experiences.
- Unregulated Risks: These may lead to firm shutdowns, lost funds, and unpaid payouts for traders.
- Selection Criteria:
- Compliance and regulation status.
- Clear payout policies and trading rules.
- Positive reviews and trader satisfaction.
As an exciting alternative to traditional trading, prop trading can offer plenty of benefits.
From the built-in risk management of limiting potential losses to the ability to scale up trading through large account sizes, there’s a lot to like about prop trading.
Prop trading has exploded in popularity in recent years. In many ways, that’s a good thing for traders. This means more prop trading firms are starting up across the industry, and those firms compete with each other to attract traders.
However, not all prop firms are equal. A key part of choosing the right prop firm is finding one that is credible, stable, and regulated. Regulated prop firms follow the rules and requirements set by the government agencies that oversee financial and business operations in their home countries.
Why is that the case — in other words, why is it important for prop traders to choose a regulated prop firm? How can finding a firm that follows prop trading firm regulations help traders in the long run? Let’s take a closer look.
The Value of Prop Firm Regulations for Traders
All businesses should follow the rules related to operating a company and comply with the regulations that are specific to their industry. However, in practice, that’s not always the case.
Many businesses in general, and prop firms in particular, do follow the rules and meet the requirements set for them by regulatory agencies and similar official departments and offices. But not all businesses do so.
Firms that follow their countries’ prop firm rules and general business rules show that they care about fairness and transparency. It’s a sign that these firms are on the level — that they offer a legitimate chance to earn payouts through sound trading strategies and traders making the right choices at the right times.
Here’s another way to look at it: If a prop firm doesn’t follow the rules set by the country where it’s based, can it be trusted to follow its own rules related to critical factors like payout percentages and timelines? Can traders truly depend on firms that skirt or ignore important laws to provide the payouts promised when those traders signed up and paid for their accounts?
Keep in mind that prop firms require traders to follow certain rules as they trade and manage their activity with the firm. On a very simple but true level, it’s only fair for firms to do the same.
Prop firms that don’t follow the rules relevant to them show that they don’t care as much about rules in general as regulated prop firms. Whether they simply don’t care or are trying to run a prop firm scam, it’s not a good sign for traders.
Regulated and Unregulated Prop Firms: The Risk Management Perspective
Here’s another critical point to keep in mind when it comes to prop firm regulations. Many unregulated businesses can be shut down, forced to halt operations, required to pay fines, or otherwise disrupted if and when government officials realize those businesses are operating outside of the law.
There are plenty of examples of firms not following important rules from across the world of trading, finance, and banking. Privacy technology provider Enzuzo compiled a list of major banks fined for failing to follow industry rules, which makes it easy to see the impact of compliance failures.
With prop firms, any of those outcomes — halted operations, large fines, and more — can cause major harm to traders. The basic agreement in all forms of prop trading is that traders pay upfront for an account and any add-ons and then receive their share of payout splits when they make winning trades.
What happens when an unregulated prop firm is shut down or otherwise forced to stop its operations? Among other issues, it puts traders’ accounts, funds already paid toward those accounts, and the opportunity to earn future payouts at risk.
A prop firm that closes down due to regulatory action likely won’t provide more payouts to successful traders. And the funds that traders have paid to open their accounts likely won’t be refunded, either. That means even successful traders who have followed all relevant prop firm rules lose funds and likely won’t be able to reclaim them.
Knowledgeable traders understand the value of risk management in trading. Making choices that reduce risk and increase the potential for positive returns is a smart decision.
So, take that same idea of risk management and expand its scope a bit further. Don’t only think about how to manage risk when making a single trade or when following a specific trading style. Consider how unregulated prop firms create more risks for trading and how regulated prop firms reduce that risk.
Finding the Best Regulated Prop Firms
Regulated prop firms don’t normally advertise that status on the top of their home pages, but they do make their compliance clear. For example, at FundedNext, we clearly describe how our company is regulated by the laws of the United Arab Emirates, where we are based.
If a prop firm makes no mention of its status anywhere, that could be a red flag. And it’s certainly a warning sign if the prop firm doesn’t answer questions about whether it follows relevant laws and rules when asked.
As vital as compliance is, it’s only one part of determining if a prop firm is reliable. Along with compliance, what else should traders look for as they seek out the right prop firm for their needs?
- Track record and trader satisfaction. Look for reviews of prop firms from trusted, impartial sources. For example, FundedNext makes it easy to find our reviews on TrustPilot.
- Specific rules and standards for payouts. Does a firm explain how and when it provides payouts? Does it make a payout guarantee?
- Clear details about trading rules and restrictions on strategies. Firms that spell out the limits on what is and isn’t allowed in trading styles show that they take a transparent approach.
An In-Depth Guide to Prop Trading
Looking for more information about prop trading? Our Complete Guide to Prop Trading offers in-depth reviews of the most important topics, from choosing the right firm to understanding payouts and so much more!
