Are Prop Firms Regulated?
Retail prop firms often operate without regulation, exposing traders to opaque practices, payout risks, and little legal protection if things go wrong.
The retail prop trading sector has grown rapidly in the past few years, fuelled by slick marketing, low entry barriers, and promises of funding for traders who can prove their edge.
But behind all the challenges and demo accounts, there’s a big question no one really asks. Are prop firms actually regulated?
The short answer? Most aren’t. And for anyone trading through one, that matters more than you might think.
Two Very Different Worlds of Prop Trading
Let’s make one thing clear, not all prop firms operate the same way, so it’s misleading to lump them together. On one end, you’ve got professional proprietary trading firms like Jane Street and Tower Research. These firms:
- Trade with their own capital,
- Hire traders as employees or contractors,
- And operate under strict financial regulation in places like the US (SEC, CFTC, FINRA) or the UK (FCA).
Then there’s the retail side, with prop firms like FTMO and My Forex Funds (MFF), which faced regulatory trouble. These firms have gained popularity by offering funded accounts to retail traders who must pass an evaluation before given the oppotunity to trade simulated capital.
Unlike traditional firms, these often aren’t regulated as financial entities, even though their business operates in a space that closely resembles traditional finance.
The My Forex Funds (MFF) Blow-Up
In August 2023, the CFTC filed a lawsuit against My Forex Funds, one of the largest and most well-known retail prop firms at the time. The allegations went far beyond a bit of false advertising.
According to the CFTC’s complaint, MFF:
- Misrepresented that traders were managing real capital,
- Manipulated trade execution by using internal software that ensured traders would fail their challenges (e.g. adding slippage, altering prices, or delaying executions),
- And withheld payouts, sometimes for arbitrary reasons, particularly when traders became consistently profitable.
In effect, the CFTC argued that the firm’s entire business model was deceptive. Instead of offering a legitimate opportunity to manage capital, it operated more like a pay-to-play simulation platform, where very few traders were ever meant to succeed, and if they did, they often weren’t paid.
MFF’s operations were frozen, assets seized, and traders were left in limbo, many unpaid, with no formal regulatory protections to turn to.
The Industry Reacted and Shifted
The fallout from the MFF case sent a clear warning to other prop firms, especially those based in North America. Since then, several firms have started to reframe their business models and language.
Where once the pitch was “we’ll fund you with real capital,” many firms now clearly state that:
- All trading is on demo or simulated accounts,
- Traders are not managing live capital,
- And the activity is actually a form of “research and analysis” service – where the trader’s job is to generate trade data, not to profit directly from real market exposure.
This shift is largely a legal safeguard, designed to align with CFTC expectations and avoid being classified as an unregistered broker or investment firm. But for traders, it changes the nature of what they’re participating in.
So, Are Retail Prop Firms Regulated?
Generally speaking, retail-focused prop firms are not regulated as financial institutions. They may be registered businesses, but that’s not the same as being licensed or authorised by the FCA, CFTC, or equivalent regulatory bodies.
This means:
- There’s no recourse if they refuse to pay you.
- Your trades may not be executed fairly – or at all.
- They can change rules, pricing models, and terms mid-contract.
- And if they collapse, as MFF did, you’re on your own.
Even in the UK, very few prop firms are under FCA oversight. In Europe, regulation is patchy at best. The burden falls on the trader to read the fine print and understand the risks, because legal protection is often non-existent.
Why It Matters
Retail traders are often lured in by the appeal of trading “firm capital” without risking their own money. But in many cases, you’re not really trading the market, you’re trading against a model, and often one designed to favour the house.
That’s not inherently illegal, but it should be transparent.
The MFF case proved what many already suspected: that some firms had engineered their systems to profit from failure, not success. It also proved that when the regulators do get involved, they take it seriously, and the consequences can be swift and severe.
Final Thoughts
Retail traders need to approach prop firms with caution. Not all are bad actors, and some may offer a useful stepping stone to develop your skills. But without regulation, you’re essentially dealing with privately run simulators, where the rules, the metrics, and the payouts can change overnight.
If you’re going to trade with a prop firm, know this: you’re not just being evaluated, you’re participating in a business model. You should understand exactly how that model works before you stake your time, effort, and money in it.
Berto