Over the past few months, we have observed a significant spike in interest from those looking to launch their own forex & CFD prop desk / prop shop. Having already consulted several startups as well as established proprietary trading firms, we are often asked for guidance on the subject of regulation and licensing. Specifically, several clients have asked our opinion as to whether a financial license is required to run a forex proprietary trading firm / prop shop.

The question of regulation for an FX & CFD prop firm will depend on several factors. Before addressing this subject in detail, we must first provide a definition for the term “proprietary trading / prop firm.”

Defining a Prop Trading Desk / Prop Shop – What is the Definition of a Forex & CFD Proprietary Trading Firm?

Before we can determine whether or not a license is required to run a forex or crypto prop desk, we would first need to fully understand the business model. From our perspective, there are 2 approaches to operating a forex & CFD proprietary trading desk.

We’ll refer to the first approach or concept as a Traditional Prop Firm. Our understanding of a Traditional Forex Proprietary Firm would involve a group of traders, either amateur or professional, that collectively trade on behalf of their employer / sponsor firm. The traders can either bring in their own funds or operate with capital provided by the prop firm directly. Regardless of how the traders are funded, the mangers of this type of prop firm set specific criteria for the traders, which are mainly concentrated on drawdowns and performance. Assuming positive performance, such returns can either be held privately by the prop firm or are distributed to investors.

The concept of a traditional prop firm differs with an emerging variation of prop desks that we are now seeing, which, for the sake of clarification, we’ll refer to as a Demo Prop Firm. The main difference between a Traditional Prop Firm and this new variation is that with a Demo Prop Firm, returns are paid based on demo account performance only. A Demo Prop Firm usually charges their clients a flat fee per month upon which they are entered into several contests whereby they can receive a prize should their performance match certain criteria.

IMPORTANT UPDATE: A License is Now Required to Use MT4 or MT5

Based on our research, policy has now changed. A financial license is now a requirement for any prop firm looking to use MetaTrader 4 or MetaTrader 5.

Licensing Thoughts for a Traditional Forex & CFD Prop Firm

A license isn’t a legal requirement to operate a traditional prop shop. From our perspective, however, it will be more challenging to operate a pop firm without any type of financial license. Many liquidity providers will not be able to onboard an unregulated money manager due to the unregulatory status of the business. This also means that banking options for traditional prop firms will be more difficult to secure without a license.

Due to challenges both in obtaining liquidity and securing legitimate banking options, a license is highly recommended for any serious forex prop trading firm. As mentioned, the specific legal classification for such activity would be asset management, meaning a forex broker license isn’t required. This is a positive aspect about asset management licensing since the costs and requirements aren’t as cumbersome as a normal forex broker license. Not only does an asset management license open many banking doors, it will also make it much easier for to obtain liquidity and keep the firm away from less reputable providers.

Do Emerging “Demo” Prop Shops Require Licensing?

Because this model is so new, specific licensing for demo prop firms represents a grey area with no clear answer. Nearly all the newly formed prop firms we’ve encountered have at least started off without a liense, after all they are only providing demo accounts to their users. In many cases, though such companies may become victims of their own success. As a demo prop firm grows bigger in size and recognition, it may catch the eye of local regulators.

Because this model is so new, local regulators err on the side of caution and may require licensing to operate in their jurisdiction as their main goal is the protection of clients, even if demo trading is all the firm is offering. Generally speaking, regulators apply the following approach: when in doubt, require regulation.

Because regulators are always several steps behind emerging trends and technology, the typical response is to ask for regulation while they can examine the business model. For this reason, if your prop firm is growing, it would make sense to consider a license, even if it is not necessarily required.

Atomiq Consulting – Guidance in Obtaining Money Management Licensing for New Forex & CFD Prop Firms

Atomiq Consulting keeps a pulse on the latest industry trends, being one of the first consultation firms to offer guidance on this topic. As such, we are in an excellent position to advise your brokerage on the dos and don’ts of forex prop shop regulation.

To learn more about obtaining an asset management license, don’t hesitate to contact us today!