What prop firm to choose? Live, Simulated, Demo, Virtual ….. AHHHHH

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The following post was authored by Michael Buchbinder, a member of Prop Traders Club, as well as the co-founder of Tradiac and a partner at Scandinavian Markets.

Ever since the shut down of My Frozen Funds a couple of weeks ago, we have seen an influx of “Experts” in the industry. There are countless nonsensical articles and posts trying to discern the difference between a Live, Demo, Simulated, Virtual account and the benefits of working with one or the other.

To be clear, there is no difference between: Demo, Simulated, or Virtual accounts. All of these accounts reflect live market data, but no trades are going through to the market.

Live accounts might be hosted on a “Live” server, but I am 99.9999% positive none of these trades are going through to the market. You are just being sold the illusion of such.

Let me go into detail and summarize for you why any prop/funded firm offering “Live” market accounts won’t be in business very long if they are putting the trades through to the live market.

MFF, is a good sample size that can help reflect the overall market. Upon scanning the legal documents, we can take some headline numbers.

$310,000,000 in sales.

Most firms charge 1% of the underlying capital they offer clients access to.

So $310,000,000 / 1% = $31 Billion in notional challenge accounts funded.

Roughly 135,000 clients or signups they had, and 24,000 live/funded traders.

24,000 / 135,000 = 18% of traders were funded

18% of $31 Billion = $5,580,000,000 of live account funding they would have offered.

Yes, $5.58 Billion in LIVE funded accounts.

Most traders who get funded are pretty smart, and they will use up all of their 10% draw down before giving up their funded accounts.

If that is the case, they would have lost or given to the markets a hypothetical $558,000,000 in REAL money to the markets.

Losing $558,000,000 to the markets while making $310,000,000 in sign up fees, is not a profitable business.

So, this is where I turn it back to the experts, how do you run a profitable prop firm by offering clients your own LIVE/REAL money to trade and lose to the markets?

I’ll follow this up with where the prop firm industry will be heading in the coming weeks.

Until then, use your logic and brains when deciding which prop to go with.

The content in this guest post by Michael Buchbinder is purely hypothetical and is based on the complaint lodged by the Commodity Futures Trading Commission (CFTC). It should not be considered as financial or legal advice.

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1 Comment

  1. No

    Math too simple in this text. I know the author has specific intentions and motivations for writing it, but still…
    Prop firms don’t send all the trades from all funded accounts to live markets. I think most people know/realize this.
    A-Book and B-Book.
    CEO of MFF spoke of this in an interview. Some system that is almost completely automated. Allegedly. (If it wasn’t automated I wonder how one would go about picking the right traders to find the right trades to copy. I suppose traditional prop firms kinda know what they are doing in this regard. Not to mention the impact of having an in-person, in-office way of doing this, with an on-site dedicated Risk Manager!)
    Now, maybe that CEO is not trustworthy and we should not believe what he says.
    Yet he is correct in principle, as this article also highlights. Any firm that actually sends all trades from all “live” accounts (passed all/both phases) to actual live markets won’t last long.
    The people who say prop firms only want people paying for failing challenges over and over are also wrong. People do not have infinite money to spend on challenges.
    Because a prop account effectively gives you even higher leverage than normal broker (some brokers do offer 500-1000x but 100x is more common, of course) people use them to gamble even more so than they would their own funds. Even some skilled traders do this. It’s not their money so why should they care.
    “5% max daily loss? Let’s buy 10 challenges and risk 4% on the first trades”
    (By the way, MFF CEO also said the trades they do copy to live is copied to a totally different account with 500x(!) leverage, not 100x like the simulated accounts traders are using). Allegedly.
    MFF had three types of accounts. One of those were “live” from the start, but with only 50% profit split, and much higher price. Meaning no evaluation at all.
    This text is misleading and lacking a lot of facts.

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