Are Prop Firms Legal ? (2024)

Over the last 6-12 months there has been a lot of controversy surrounding the online prop firm space, specifically forex prop firms. This has been due to a number of the largest forex prop firms being shut down by regulators for their business practices.This has led many traders to question the legality of online prop firms and whether the bubble is about to burst.

In this article, we’ll discuss the legality of online prop firms, the regulation in place and what we expect to see in the industry over the next few years. So, let’s get into it…

The Legality Of Forex Prop Firms

The legality of online prop firms has very much been questioned since My Forex Funds and The Funded Trader, among others, were shut down by the regulators. This has led to a discussion in the industry around the future of prop firm trading and whether the bubble has burst. We very much support this discussion and ultimately, we want the online forex prop firm space to become much more regulated and provide a safer environment for traders to grow both their skills and their profits from the markets.We’re very aware that currently there is a real lack of information out there regarding the legality and regulation of online prop firms, We want to clear things up and provide our take on the industry and how traders can best position themselves for the long term.

Are Forex Prop Firms Legal?

Currently, online forex prop firms are legal, although there is lacking documentation and regulation for prop firms to follow.It is not illegal to operate or trade with a prop firm. However, where most online prop firms come unstuck is in their business practices and terms of service.Some of the largest prop firms that I’m sure you would have heard of have fallen victim to these mistakes over the last few months. This has led to regulators shutting these prop firms down and potentially taking legal action against the business owners.

However, this doesn’t mean that online prop firms are not legal – this just highlights the lack of regulation and guidance – meaning some prop firms are choosing to operate in a non-ethical manner for their traders, and operating more as Ponzi schemes.

If you take a look into all of the prop firms that have been shut down, they were all ‘simulated’ capital prop firms, offering insane profit splits and operating in a Ponzi style business model. E.G, they needed more traders coming through the door to pay out the withdrawals from their profitable traders.

Is The Wider Prop Firm Industry Legal?

What many newbie traders forget is the fact the prop firm industry has been alive and well for decades. It’s only within the last 6 or so years that the online model has come to the market – before then, all prop firms were brick and mortar businesses with a real trading floor for traders.All brick and mortar prop firms operate in the same business model as Lux Trading Firm. They provide real trading capital to profitable traders, in exchange for a profit split.No brick and mortar prop firms offer ‘simulated capital’ to traders – this is where the online prop firm industry has largely differed from the traditional legal model.

Typically, the brick and mortar prop firms will have traders on a trial period on a demo account (as we do at Lux Trading Firm), before proving themselves and being awarded a real trading account funded with the prop firm’s capital. At this point, the trader will have to adhere to risk management frameworks and receive a split of the profits they make. Their capital is then scaled exponentially when milestones are hit. This is exactly what we do here with our funded traders, and it’s a far cry from what the ‘simulated prop firms’ are offering.

Will Online Prop Firms Become Regulated?

We’ve seen the regulators stepping in now on a number of occasions and closing some of the online prop firms. This alludes to the fact that the regulators are watching the online prop firm space, and we believe it’s very likely that the industry will become heavily regulated over the next few years. This is great news for traders, and for us here at Lux Trading Firm!

The reality is, when regulation comes, safety comes. Traders will be much safer and be entitled to much more than they currently get from a lot of the simulated prop firms. We actively built our business around the idea that the industry will be regulated, instead of a quick cash grab. We’ve modeled our whole business model in line with what we believe the regulations will state – so we aren’t anticipating any changes to the way we operate here!

What Will Happen To Online Prop Firms When Regulation Is Enforced?

We’ve already seen a flavor of what will happen to online prop firms when regulation is enforced. We expect that:

  • Simulated capital prop firms will be scrutinized and shut down. This is largely due to the fact they operate a Ponzi business model. Profitable traders cost these prop firms money. Therefore, they try to market to unprofitable traders, make trading harder than it needs to be, and have to constantly get new traders through the door to pay challenge fees needed to pay out the profitable traders. This is a Ponzi scheme, dressed up as forex trading.
  • Real money prop firms, like Lux Trading Firm, will continue to operate and report to the regulators. There may be changes to the amount of capital prop firms are allowed to allocate and new reporting procedures, but beyond that, we expect no change. This is because real money prop firms operate exactly as brick and mortar prop firms do, just with less overhead and physical space needed.

In Summary – Are Forex Prop Firms Legal?

In conclusion, forex prop firms are legal both to own and to trade with, although largely unregulated in the online space currently.We expect to see regulation coming and strengthening in the upcoming years. If you want to stay ahead of this as a trader, ensure you’re trading with a real money prop firm.

Are you looking to become a funded trader? Work with Lux Trading Firm today!

Are Prop Firms Legal ? (2024)


Are Prop Firms Legal ? ›

US law generally allows prop firms to operate and for them to provide traders with capital to trade. However, there are specific regulations regarding how prop firms can manage these funds and the relationship between the firm and the trader.

Are prop trading firms legal? ›

Currently, online forex prop firms are legal, although there is lacking documentation and regulation for prop firms to follow. It is not illegal to operate or trade with a prop firm. However, where most online prop firms come unstuck is in their business practices and terms of service.

Do prop firms actually pay out? ›

Statistics on Average Trader Payouts

Profit Split: The average prop firm will offer a 80-20 profit split once you become a funded trader. TFT, on the other hand, gives up to a 90% split, — even as high as 95% in some promotions — the highest in the industry.

Are prop firms reliable? ›

Prop firms are an excellent source of accessing further capital to increase profit potential. Passing a prop firm's evaluation means reaching a profit target while staying within its risk management rules. Prop firms require traders to use their brokers, which can be positive or negative depending on the broker.

How do I know if my prop firm is legit? ›

Look for the firm on rating sites (such as TrustPilot). See if the firm is on lists of good prop firms (such as this one). Read what traders say about the firm. Remember, though, that ratings sometimes can be manipulated, and reviews can be fake.

Top Articles
Latest Posts
Article information

Author: Terence Hammes MD

Last Updated:

Views: 5971

Rating: 4.9 / 5 (69 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Terence Hammes MD

Birthday: 1992-04-11

Address: Suite 408 9446 Mercy Mews, West Roxie, CT 04904

Phone: +50312511349175

Job: Product Consulting Liaison

Hobby: Jogging, Motor sports, Nordic skating, Jigsaw puzzles, Bird watching, Nordic skating, Sculpting

Introduction: My name is Terence Hammes MD, I am a inexpensive, energetic, jolly, faithful, cheerful, proud, rich person who loves writing and wants to share my knowledge and understanding with you.