Prop trading challenge firms offer a unique offering for US-based traders. Challenges can incentivize traders to higher potential profits, and the contests allow access (and leverage) to asset classes that are typically off-limits in the U.S. because all trading is simulated. An example of this is contracts for difference (CFDs), which have high leverage, high risk and a wide range of strategies. But not everyone is excited about this arrangement – including a platform with significant influence over the industry.
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How prop traders use CFDs
MetaQuotes is the developer of the world-class MetaTrader platform that can be used for trading various instruments and easily integrates with various brokers or prop firms. Currencies, futures and CFDs are popular tools due to the leverage available, but the last item on this list makes MetaQuotes uneasy.
CFDs are derivative securities intended to represent a bet between two market participants. Like a stock option, a CFD can be created by any two parties who want to bet on the price of a specific asset, commodity or currency. Unlike options and futures, CFDs do not have an expiration date by which one party must deliver the actual asset to the other party.
Here is a simple example of a CFD trade: Investor A believes that the price of XYZ asset will rise from $100 to $110 next month. Investor B believes that the XYZ asset is overvalued and assumes that the price will be $90 in one month. Both investors agree to a CFD on the XYZ price, which allows them to apply leverage to the bet. If XYZ rises to $112 in just a few weeks, Investor B could decide to sell at a loss, while Investor A pockets the difference as profit – $12 profit per CFD, which with the available leverage amounts to a significant sum can lead.
The story goes on
CFDs are banned in the United States, but prop trading firms have found a workaround to their simulated trading challenges. Because participants in prop trading challenges pay an upfront fee to use paper trading systems and earn profits based on their performance, CFDs are not actually traded. Thanks to this agreement, CFD brokers offered MetaTrader products to US prop firms under a so-called gray label license. But this distinction no longer reassures MetaQuotes, which is now taking action against prop trading firms that use this license with the tenacity of a bee-sting bulldog.
Off to the futures market
As MetaQuotes cracks down on CFD use, many US prop trading firms have abandoned the asset class. MetaTrader is too valuable to risk losing access, so prop traders who used to trade CFDs suddenly have to trade futures.
CFD traders in Europe still have access to these markets, but US traders see the gap at prop firms having closed. Even if prop trading challenge firms are not subject to the same regulatory scrutiny as large institutions, MetaQuotes will likely still pull the plug. As a result, advertising firms courting US customers are either moving to new platforms (like cTrader) or pushing users into the futures market.
Futures trading takes place on exchanges, meaning a safer and more regulated market. However, maximum leverages are lower than CFDs and futures contracts expire, whereas CFDs can remain open indefinitely. Prop trading firms seeking US clients who want to continue using MetaTrader platforms may need to consider moving to the futures market.
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This article, “CFD Crackdown Pushing Prop Traders Into Uncertain Futures Markets,” originally appeared on Benzinga.com
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