Running strategies on other people's capital

Graduate · enrolled learners

This lesson opens with My Forex Funds, 2023.

What happened

My Forex Funds, run by Traders Global Group, was a large proprietary-trading firm that sold funded-trading challenges: retail traders paid a fee to attempt a test, and those who passed were told they would trade the firm's capital and keep a share of the profits. In 2023 the US CFTC and Ontario's securities regulator charged the firm with fraud, alleging that it did not operate the way it claimed: rather than genuinely funding successful traders and profiting alongside them, the firm was alleged to operate against its own customers, for example using a hidden software plugin that worsened the execution of accounts that were doing well, and structuring the business so that customers' losses were the firm's gains. The firm had taken in roughly 310 million dollars from customers. Nothing here is a market-risk story: the traders' real risk was not the market but the firm, the counterparty whose incentives, as alleged, were served by the traders losing, and whose promises about funding and profit-sharing were, per the regulators, not what was actually happening.

The decision point

Trading a strategy on someone else's capital, through a proprietary-trading firm or a funded account, adds a risk that has nothing to do with the market: counterparty and incentive risk, the risk that the firm providing the capital is itself the counterparty, and that its incentives are served by the trader losing rather than winning. My Forex Funds is the case: a funded-account firm that took in roughly 310 million dollars was charged with operating against the very customers it claimed to fund, allegedly worsening the execution of accounts that were doing well, so the trader's real adversary was not the market but the firm on the other side of it. The lesson that closes this track is that a trading system does not run in a vacuum; it runs inside a business arrangement, and that arrangement is part of the system's risk. Who provides the capital, who is the counterparty to the trades, and who profits when the trader loses are questions as important as the strategy itself, because a brilliant strategy run through a firm that profits from your failure is a strategy working for someone else. So the discipline is to assess the honest economics of any capital arrangement by asking who profits when you fail: if the firm makes money when you lose, its interests are opposed to yours, and its promises deserve the scrutiny of a counterparty, not the trust of a partner. My Forex Funds is what the funded-account model looks like when the answer to who profits when you lose is the firm itself, and it is the last reminder of this track that the engineering of a trading system includes the business it operates inside, because a system whose counterparty wins when it loses is not an edge; it is a trap dressed as an opportunity.

Recorded loss

$310,000,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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