Awesome right? Just a few clicks and someone else is going to put their hard earned money in an account and let you trade it. When (if) you do well, the profits are shared with you. When you do poorly, no sweat, it was never your money to begin with.
It seems very win / win for you, right?
We agree. BUT… if it is win / win for you… how is it also win / win for the firm?
Back in the early 2000s, there was a firm here in Geneva, Switzerland that operated as an fx broker and platform. They were quite large. We won’t name names, but the firm’s name rhymed with Shmdvanced Shmurrency Shmarkets.
Like any broker (forex or otherwise), this firm offered a trading platform, brought in client capital and traders would use the tools available, or their own strategy to try and produce a profit. Pretty straight forward.
But this firm knew what all other fx brokerage platforms (and casinos) also knew… 99% of all traders will eventually lose. So, they began playing against those who traded on the platform (allegedly). When clients placed a trade, the open market was not on the other side, the firm was. When you went long, they went short. When you went short (allegedly)… ok you get the idea.
So what happened when someone actually started doing well and produced a profit? The firm closed the account and sent the profitable trader home with the winnings (just… like… a… casino) (allegedly).
As a results, this firm was raking in the dough. Not only were they making the spreads on every trade (like any other brokerage firm), but they were effectively banking as profits nearly every dollar that was deposited on their platform.
In 2006, the laws in Switzerland changed and brokers like these were required to obtain a banking license within a few years. This regulatory requirement put an end to the counter party loophole and the business began drying up… immediately. Long story short, they were consumed by a firm that already had a banking license and the platform changed to the traditional “profit by spread” strategy regulated fx firms follow now.
In the end, there was nothing illegal about what was taking place. This firm was simply playing the odds against those who sought a profit (as unlikely as they may have been). And instead of finding ways to help traders produce a profit, they were incentivized to bring on accounts that had no hope of ever winning.
Interesting story… but what does this have to do with funded trading platforms?
We’re glad you asked… because there is very little difference between the two. Look out for part 2 tomorrow.