“I believe that 'gamification' can be actually beneficial if done with good intentions,” David Varga, Co-Founder of Fintokei and Purple Trading, told Finance Magnates, amid the “video game” remark on prop trading by the Italian financial markets regulator. BullRush's CEO, Trent Hoerr, also added that “if done correctly, gamification can be a benefit for traders.”

Highlighting its educational value, giving the Duolingo app as an example, Varga explained that such practices, when used by modern prop trading firms, only follow a wider societal trend.

Italy's Consob first acknowledged its interest in prop trading firms last month by issuing a warning against them. According to the regulator, prop trading platforms “simulate an online trading activity in a type of finance video game aimed at passing skill tests and making a profit.”

The supervisory authority further expressed concerns over deceptive practices and potential risks associated with these trading simulations, part of a broader European regulatory trend.

“The recent CONSOB warning comparing trading evaluations to video games was necessary and timely,” said James Glyde, CEO of PipFarm, a prop trading platform. “The biggest risk to consumers in this model is poor conduct, and that's precisely what the regulator targeted in their warning.”

Gamification in Prop Trading Controversy

Trading is supposed to be a serious task. It is no way near to playing video games. However, from the supervisory authorities' perspective, there is cause for concern. Italy's securities regulator, Consob, has issued a stark warning about the rise of retail proprietary trading firms, likening their activities to financial “video games.”

“Most industries, especially the education industry, are finding ways to gamify their platform to help improve the learning experience,” commented Trent Hoerr, CEO, BullRush.

Consob expressed concerns over deceptive practices and potential financial risks associated with these trading simulations, part of a broader European regulatory trend.

Varga acknowledged the potential risks highlighted by regulators but stressed a broader societal shift towards gamification.

“Let’s not forget that one of the original purposes of the modern prop trading or evaluation firms was to help traders improve,” he pointed out. “To hone their skills, improve their discipline and make them more consistent. And to have both sides benefiting from such improvements.”

“I think this aspect of this industry is somehow buried below all the flashy marketing 'video-game-like' glitter, but it is actually something that should be endorsed much more instead,” Varga expressed. “And I am glad that there still are firms who mean this well, including ours. So, I can understand the 'video game' label to some extent, but fundamentally I don’t really agree with it.”

The Italian regulator (Consob) has issued a warning against “prop firms” after having received multiple complaints from “players”.

No action is being taken for now. Regulators are trying to identify the eval-trading industry's gender.
Is it trading? Gaming?
A headache, for sure. pic.twitter.com/ofltMGSkkp

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Concerns over Prop Trading Growth

Consob was not the first to sound an alarm against prop trading firms. Similar concerns have already been echoed by financial market supervisory authorities across Europe. Belgium's FSMA and Spain's CNMV have issued parallel warnings, reflecting a continent-wide unease with the rapid growth of prop trading schemes.

The FSMA has warned the public about the dangers of proprietary trading firms, which engage in trading financial products like shares, bonds, commodities, and cryptocurrencies, and often exploit consumers' financial naivety.

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— Forex Prop Firm Review (@fxpfreview) March 20, 2024

“Gamifying trading, such as running trading competitions or challenges where the user achieves XP, badges, and certificates based on their performance can drive user engagement and knowledge retention. Overall, I believe gamification is a net benefit to the trading community,” Hoerr added.

Meanwhile, other top regulators are also taking an interest in prop trading. As Finance Magnates exclusively reported earlier, the Czech National Bank stated that some prop trading firms may fall under the MiFID regulatory framework, depending on their business models. While certain activities may require MiFID compliance, others may be exempt, and suspected fraud would fall under criminal law. The European Securities and Markets Authority (ESMA) has also begun discussions on regulatory frameworks for prop trading firms, signaling an effort to regulate this sector. Recently, ESMA conducted an initial review of these firms but did not confirm any regulatory moves.

ESMA Discusses Prop Trading Regulation

Despite the warnings and regulatory uncertainties, many forex and CFDs brokers are jumping into prop trading by offering these services. Trade.com is one of the brokers that recently introduced its prop trading services, branded as Trade.com Challenges. This new offering is managed by Tplus Technologies Limited, a Cyprus-registered corporation.

Roei Gavish, Group CEO of TRADE.com, emphasized the importance of adhering to financial regulations as a key aspect of TRADE.com's strategy, particularly in the development of its innovative trading products.

“In order to ensure that everything works in compliance with regulatory standards in Europe, the US, and any other market in which we operate, we are working to establish a virtual link between financed trading and actual trading experience,” Gavish said.

Currently, prop trading companies must comply with consumer protection, data protection, and international sanctions laws. While many are registered in the US, UK, UAE, and Saint Vincent and the Grenadines, numerous firms are also registered within the EU.

They lure individuals into risky investments without requiring their own capital. Additionally, consumers undergo expensive and difficult courses, which primarily generate revenue for the firms. Many end up paying for multiple courses without ever accessing real trading opportunities.

“The industry is rife with fresh drama every week, with situations like platform issues, liquidity problems, rule changes, and payout rejections occurring daily,” added Glyde. “It's encouraging that they did not find fault in the business model but rather in the conduct of some operators, which is a well-known systemic issue.”

Gamification's Potential vs. Risks

In the past six years, Stathis Xenos, an entrepreneur with expertise in fintech, prop trading, and social & copy trading, has explored gamifying trading and investing. He has even developed two MVP products with the goal of enhancing the trading experience and boosting users' trading skills.

“Gamification leverages a trader’s natural desire for competition, success, and socialization,” commented Xenos. “By treating the entire process like a game, it cuts out the boring parts of the user experience, making it more engaging. It's a powerful tool for businesses to connect with customers, offering them an accessible and educational experience.”

He acknowledges a potential concern with gamification in trading: the excitement generated by challenges, rewards, and objectives could encourage excessive risk-taking. He believes this heightened engagement might lead users to pursue risks they wouldn't normally consider.

“While gamification offers a fresh and exciting approach to investing, it must be implemented thoughtfully and responsibly,” added Xenos. “It has great potential, but we need to be cautious about its implications. I personally see gamification shaping the future of trading.”

Finance Magnates has contacted Consob for a comment on the “Video Game” issue. The regulator has not responded as of press time.