CFD Crackdown Pushing Prop Traders Into Uncertain Futures Markets

Prop trading challenge firms offer a unique proposition for U.S.-based traders. Challenges can springboard traders into higher potential earnings, and the contests give access (and leverage) to asset classes that are usually off-limits in the U.S. because all trading is simulated. Contracts for differences (CFDs) are one example of these, with high leverage, high risk and a broad range of strategies. But not everyone is thrilled with this arrangement — including one platform with significant industry sway.

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How Prop Traders Use CFDs

MetaQuotes is the developer behind the top-rated MetaTrader platform, which can be used to trade various instruments and is easily integrated into different brokers or prop firms. Currencies, futures and CFDs are popular tools because of the leverage available, but the last item on that list is making MetaQuotes uneasy.

CFDs are derivative securities designed to represent a bet between two market participants. Like a stock option, a CFD can be created by any two parties looking to wager on the price of a particular asset, commodity or currency. Unlike options and futures, CFDs do not have an expiration date when one party must deliver the actual asset to the other.

Here's a basic example of a CFD trade: Investor A believes the price of XYZ asset will rise from $100 to $110 over the next month. Investor B believes that XYZ asset is overvalued and thinks the price will be $90 in a month. Both investors agree to a CFD on XYZ price, which allows them to use leverage on the bet. If XYZ rises to $112 in just a few weeks, Investor B might choose to sell for a loss while Investor A collects the difference as profit — $12 profit per CFD, which can result in a considerable sum with the available leverage.

CFDs are banned in the United States, but prop trading firms have found a workaround for their simulated trading challenges. Because participants in prop trading challenges pay an upfront fee to use paper trading systems and receive profits based on their performance, CFDs aren't actually traded. Thanks to this arrangement, CFD brokers offered MetaTrader products to U.S. prop firms under what's known as a grey label license. But this distinction no longer appeases MetaQuotes, which is now going after prop trading firms using this license with the tenacity of a bee-stung bulldog.

Into The Futures Market

With MetaQuotes cracking down on CFD usage, many U.S. prop trading firms have abandoned the asset class. MetaTrader is too valuable to risk losing access, so prop traders who formerly swapped CFDs suddenly find themselves trading futures. 

CFD traders in Europe can still access these markets, but U.S. traders are seeing the prop firm loophole closed. Even though prop trading challenge firms don't face the same regulatory scrutiny as big institutions, MetaQuotes is likely pulling the plug anyway. As a result, prop firms courting U.S. clients are either switching to new platforms (like cTrader) or pushing users toward the futures market.

Futures trading happens on exchanges, which means a safer and more regulated market. However, maximum leverage levels are lower than CFDs, and futures contracts expire, while CFDs can remain open indefinitely. Prop trading firms seeking U.S. clients who wish to continue using MetaTrader platforms may have to consider shifting to the futures market. 

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