The Financial Services and Markets Authority of Belgium (FSMA) today issued a warning about the risks associated with the activities of so-called trading firms.
The latter are places that trade on their own account and offer consumers the opportunity to play a game of shadow investing, a practice that costs money and can lead to reckless behavior.
Prop trading (short for proprietary trading) companies allow consumers to trade financial products such as stocks, bonds, commodities, cryptocurrencies, CFDs and forex products without having to use their own money to do so.
Before consumers are allowed to trade financial products for a trading company, they must face a number of challenges. These courses are not easy, they are not cheap, and often consumers must attend and pay for many of them before they can successfully complete them. There is a good chance that some consumers will never pass the courses. This is how trading companies make money from them.
A consumer who has successfully completed the challenges receives a “certificate” – a diploma issued by the company itself – and can start trading. This includes a game of shadow lining. The consumer never actually transacts. He or she plays on a demo account with the trading company. The latter may decide to perform one or more demo trades for a consumer on a real trading platform. If such copied transaction turns out to be profitable, then the consumer receives a commission.
However, the prop trading company decides on its own under what conditions consumers can use their platform and which simulated trades to copy. It is therefore difficult for a consumer to determine whether he is entitled to commissions and, if so, how much. A consumer can thus spend a lot of time and energy without any return.
FSMA is receiving more and more inquiries about such companies. He’s seeing an increase in ads for brokerage firms on social media. Also, various websites are popping up that offer paid courses to help consumers succeed in the “challenges” of trading companies.
Companies encourage trading in complex financial instruments such as CFDs and forex products. These products are extremely risky and consumers often lose their entire investment. This trend is about FSMA.
Therefore, FSMA warns the public about the activities of such commodity trading companies. He also warns about the ecosystem of any business riding on the popularity of brand companies. They offer services related to the latter’s activities, such as courses or marketing software used for training.
The regulator emphasizes that commodity trading companies do not have any license and are therefore not allowed to provide investment services. The same goes for prop traders. The definition of the latter is consumers who have successfully completed a course.
Many studies have shown that the gaming element in prop trading can lead to overconfidence and recklessness among users, both in shadow investing and in real trading in which they use their own money.