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Prop Trading Alert

Prop Trading Firm Alert: FINRA and SEC enforcement against the industry.

FINRA Regulatory Notice 10-18 fired the latest warning shot across the bows of day-trading-style prop trading firms. We've been covering this developing story and warning prop traders for over a decade about regulators pressuring day-trading firms to modify their business models. Certainly, the industry has made changes and consolidated, with many firms failing and falling by the wayside.

Prop trading firms often ask aspiring traders for deposits, and they make 99% or 100% payouts on the trader's gains and charge losses to the deposit accounts. They also use high leverage -- more than the 4:1 limit for retail pattern-day traders. Some failing firms have commingled traders' deposits and results and inappropriately mixed in other business models including alternative investments (managed accounts and hedge funds), education and commissions or rebates. We wrote about the infamous Tuco Trading enforcement case, which committed most of these infractions.

Recently, we wrote about FINRA Reg. Notice 10-18, in which FINRA warns clearing brokers to be on the look out for "beneficial owners" within their prop trading firm clients. FINRA is looking for disguised retail customers navigating around the Reg T margin rules. FINRA has authority over clearing brokers, and many of these prop-trading firms fly below FINRA and SEC radar screens, because they don't regulate these firms directly. Robert Green thinks Dodd-Frank Fin Reg may be a driving force to coordinate and unleash more wide-scale enforcement attacks from regulators on the prop trading firm industry.

Visit our separate section for proprietary traders and firms.