What are the legal and regulatory considerations for prop trading? (2024)

The primary regulatory and legal considerations for proprietary trading firms include:

Registering with the appropriate financial regulatory bodies,

Ensuring minimum capital requirements are met,

Implementing effective risk management strategies to promote safe trading practices,

Complying with anti-money laundering (AML) and know-your-customer (KYC) regulations,

Accurately reporting trades to the relevant trade authorities.

Best Prop Firms

Topstep stands out as a premier proprietary trading firm that provides traders with the chance to trade futures contracts. Utilizing a distinct two-step evaluation process, traders can demonstrate their proficiency on a simulated account before potentially obtaining funding for live trading. Topstep offers three account sizes: $50,000, $100,000, and $150,000. Regular pricing begins at $165 per month, with frequent discounts available. Traders can leverage up to 1:100 and access a wide range of futures markets, including stocks, commodities, cryptocurrencies, bonds, and metals. The commissions and fees on the Trading Combine (simulation account) mirror those on a live funded account, enabling traders to hone their skills in a realistic market environment. To support traders, Topstep provides a wealth of educational resources, including free group coaching, to enhance their chances of success.

Account Details

• 💰 Account Currency: AUD, CAD, COP, GBP, JPY, EUR, MXN, and USD
• 🚀 Minimum Deposit: $1
• ⚖️ Leverage: 1:100
• 💱 Spread: Float
• 🔧 Instruments: Futures of the CME group for stocks, commodities, bonds, and metals
• 💹 Margin Call / Stop Out: The broker automatically closes all open positions every Friday

❗️ Open An Account

FTMO is a proprietary trading firm that offers skilled traders the opportunity to manage a funded account of up to $200,000. The firm provides access to a diverse array of instruments, including Forex, stocks, indices, commodities, and cryptocurrencies. To qualify for a funded account, traders must successfully complete a two-step evaluation process.

For beginners, FTMO offers a Free Trial account with the same trading conditions as the evaluation challenges, allowing newcomers to practice without financial risk. Long-term traders can opt for a Swing Account, which allows them to hold positions over the weekend and trade during macroeconomic releases without restrictions. FTMO supports trading on the most popular platforms, including MT4, MT5, cTrader, and DXtrade, with leverage up to 1:100.

In addition to its robust trading offerings, FTMO is renowned for its comprehensive educational resources and ongoing support, helping traders enhance their skills and achieve success.

Account Details

• 💰 Account Currency: USD, EUR, GBP, CZK, CAD, AUD, CHF
• 🚀 Minimum Deposit: From €155
• ⚖️ Leverage: Up to 1:100
• 💱 Spread: No data
• 🔧 Instruments: Currency pairs, stocks, stock indices, commodities, cryptocurrencies
• 💹 Margin Call / Stop Out: No data

🎯 Legal and Regulatory Considerations for Proprietary Trading

• Registration
• Minimum Capital Requirements
• Risk Management
• AML and KYC Requirements
• Trade Reporting

Registration

Proprietary trading firms must register with relevant financial authorities. This process involves submitting detailed information about the firm's structure, business activities, and employed traders. The need for registration varies by jurisdiction. For instance, in the USA, prop trading firms dealing in securities must register with FINRA and comply with its rules, though some firms exploit legal loopholes to avoid regulation. In the UK, prop trading firms are not required to be regulated. Individual traders may also need specific licenses, often requiring them to pass qualifying exams demonstrating their understanding of financial markets and regulations.

Minimum Capital Requirements

Prop trading firms are often required to maintain a minimum level of net capital, which ensures financial stability and protects market participants. These requirements act as a financial buffer, ensuring firms have sufficient resources to cover potential losses. While firms trading their own funds typically don't need to comply with these regulations, having adequate capital is still crucial for mitigating risk and ensuring operational stability.

Risk Management

To ensure safe trading practices and comply with regulatory standards, prop trading firms implement robust risk management procedures. This includes setting limits on trade amounts to control potential losses, employing real-time monitoring systems, and regularly assessing overall risk exposure. Automated systems can trigger alerts or halt activities if predetermined risk thresholds are exceeded, helping firms operate responsibly and safeguard their financial health.

AML and KYC Requirements

Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations are essential for preventing financial crimes. Prop trading firms must implement policies to verify clients' identities and monitor transactions for suspicious activities. Even though prop firms typically trade their own funds, they must still comply with AML and KYC laws to maintain the integrity of the financial system. This involves establishing reporting mechanisms to detect and prevent money laundering, ensuring due diligence when engaging with external parties.

Trade Reporting

Trade reporting involves the regulatory requirement for firms to publicly report all transactions immediately after completion. This enhances transparency, promotes financial stability, and supports the detection of market abuse. Prop trading firms must comply with trade reporting regulations, which vary based on the assets traded. Different reports include transaction reports, counterparty reports, position reports, and risk exposure reports. These requirements may vary by jurisdiction and the nature of the traded assets.

Regulatory Exceptions

The regulatory landscape for prop trading firms is complex. Typically, these firms operate with their own capital, placing them outside many securities regulations. However, firms acting as broker-dealers must register with the SEC and FINRA in the USA. Some firms exploit regulatory loopholes, such as using demo accounts or aligning with Section 240.15b9-1 of the 1934 Securities Exchange Act, which allows broker-dealers to remain unregulated if they carry no customer accounts and become members of a national securities exchange.

Recently, a new type of prop trading firm has emerged, offering funded accounts to independent traders instead of hiring them directly, thus avoiding regulation. These firms often market themselves as financial education businesses and connect traders' demo accounts to the firm’s capital. While this practice allows them to escape SEC regulation, the SEC is actively seeking to close these loopholes and expand its regulatory scope to include previously exempt proprietary trading firms.