Italian Regulator Issues Warning About Risks of Prop Trading Firms

The Italian securities regulator, Consob, has issued a public advisory regarding the potential dangers associated with proprietary trading (prop trading) firms. These firms trade for their own accounts and offer consumers opportunities to engage in investment activities that can be costly and encourage reckless behavior.

Prop trading firms enable consumers to trade various financial instruments such as shares, bonds, commodities, cryptocurrencies, CFDs, and forex products without using their own capital. However, the seemingly risk-free nature of these opportunities often conceals significant financial risks.

Consob warns investors about online and social media promotions that simulate trading activities. These promotions, often likened to a finance video game, require passing skill tests to make profits. This operating scheme is known by various names, including shadow investment games, funding trading, and financed trading accounts.

The regulatory notice explains that these schemes typically involve enrollment in paid training courses. Those who pass the test are offered a chance to transition from simulated trading to real trading with capital provided by the prop firms. These schemes often promise participants the opportunity to share in any profits made.

Consob has received multiple reports from users who have signed up for such offers. Complaints include the contrived difficulty of the tests designed to push participants to keep trying and the failure to share the promised profits. Similar warnings have been issued by financial regulatory authorities in Belgium (Fsma) and Spain (Cnmv), highlighting the risks associated with these offers, which can lead to the loss of pledged amounts.

Consob has concluded that these entities are under investigation for exploiting the financial inexperience of consumers and enticing them into high-risk investments. The sector operates in a regulatory grey area, as most prop trading offerings predominantly feature demo accounts. These accounts, designed for training and strategy testing purposes, are not subject to regulatory oversight in any jurisdiction, as current information allows.