Demo account prop trading services without real-market executions and subsequent settlements cannot be categorized as investment services under existing regulations, the Czech National Bank (CNB) clarified in a FAQ published on its website a while ago.

Demo Account Prop Trading Is Beyond Regulatory Scope

Apart from the clarification on its website, the Czech regulator also exclusively told Finance Magnates that some prop trading business models “may be subject to the MiFID regulatory framework.” From the FAQ and its response to Finance Magnates, it can be assumed that the CNB is differentiating between the two prop trading models: demo accounts and real accounts.

Interestingly, most prop firms, including many major ones, offer demo account trading services. FTMO, a Czech-domiciled prop trading firm that generated $213 million in revenue in 2023, also offers demo account trading.

The CNB further explained that even if a certain activity formally meets the characteristics of one of the investment services but does not relate to any investment instruments, it cannot be categorized as an investment service under existing laws.

“The essence of simulated trading on a demo account with virtual funds is, simply put, the opportunity to try trading in a test environment, which allows you to work with real market data, but without entering and executing real trading instructions,” the CNB noted (translated from Czech). “It, therefore, follows from the very nature of this activity that it cannot meet the characteristics of the provision of investment services.”

“It is, therefore, not an activity subject to a CNB permit.”

The regulator also clarified that virtual funds used for simulated trading on a demo account do not meet the characteristics of electronic money, as they do not represent any claim against the entity that issued them.

Regulators Looking into Prop Trading

Meanwhile, several other regulators are evaluating their regulatory scope regarding prop trading platforms. Finance Magnates earlier exclusively reported that the European Securities and Markets Authority had conducted an initial review of such prop trading firms and had also discussed potential regulations for the industry. The Australian regulator also clarified that it is “monitoring the emergence of prop trading firms.”

However, regulators in Italy and Belgium have taken a harsher stance, issuing warnings against all prop trading activities, with one even calling them “video games.”