Italy's securities regulator, Consob, has issued a warning to investors about the risks associated with retail prop trading activities. It describes them as online trading simulations that promise profits but may lead to financial losses.

Consob Flags Prop Firm “Trading Games” as Potential Investor Trap

The Italian market watchdog describes the prop trading industry very interestingly, completely different from how the companies operating within it do.

The regulator said these offerings, promoted on websites and social media platforms, "simulate an online trading activity in a type of finance video game aimed at passing skill tests and making a profit." They are presented under various names, including "shadow investment game," "funding trading," and "financed trading accounts." These simulations often require users to enroll in paid training courses before participating in online trading challenges.

According to Consob, the schemes typically involve users progressing from simulated trading to purportedly real trading using capital provided by self-described "proprietary firms" or "prop firms." To entice participants, these firms offer to share some profits generated.

The regulator emphasized that these simulations carry significant risks for savers and could result in the loss of invested funds.

“Consob has received several reports from users who have signed up for such offers. The complaints concern both the level of difficulty of the tests, which are allegedly contrived to push ‘players’ to try again, and the failure to share the alleged profits.” The regulator commented.

Regulatory interest in proprietary trading began in February, leading to the withdrawal from part of the market by the popular trading platform provider MetaQuotes, difficulties in access for investors from the USA, and the suspension of operations by some companies

Increasing Number of European Regulators Warning Against Prop Trading

Similar warnings have been issued by financial market supervisory authorities in Belgium (FSMA) and Spain (CNMV), highlighting a growing trend of concern among European regulators.

At the end of May, Finance Magnates reported that the European Securities and Markets Authority (ESMA) had convened a discussion on the regulations concerning prop trading. Remonda Kirketerp-Møller, the founder and CEO of regulatory compliance firm Muinmos, shared that “regulators have been conducting studies, gathering data, and engaging in consultations with industry participants to better understand the nature and implications of prop trading.”

Currently, prop trading firms are primarily governed by laws such as consumer protection rules, data protection regulations, and international sanctions conditions. These companies are predominantly registered in the US, the UK, the UAE, and Saint Vincent and the Grenadines, although many are also registered within the EU.

In early June, the Czech regulator indicated that prop trading firms “may be subject to MiFID regulations.” The business models used by firms engaged in prop trading (technically funded trader services) can take various forms, some of which may be subject to the MiFID regulatory framework.” Notably, one of the leading prop trading firms, FTMO, is based in the Czech Republic.

Although the industry is controversial among regulators and some investors, it attracts more clients. FX/CFD brokers are also taking advantage of this by increasingly adding proprietary trading offers to their basic services. This month, ThinkMarkets joined them by launching its own proprietary trading brand, ThinkCapital.