When it comes to the Commodity Futures Trading Commission (CFTC) vs My Forex Funds (MFF), is it an exaggeration to say that the future of prop trading is at stake? I don’t think it is.
At the time MFF was one of the top five prop firms in the world, and had thousands upon thousands of active traders. Prop trading firms have always resided in a gray area just outside the CFTC’s jurisdiction, so the forced shutdown of such a prominent firm was a complete shock.
If you aren’t up to speed, here’s a quick summary of what’s transpired so far: In an unprecedented move against a prop trading firm, the CFTC froze all of MFF’s assets on August 28, 2023. The CFTC threw out the terms “fraud” and “Ponzi scheme” as justifications, and MFF had no choice but to completely shut down operations.
It took two months, but My Forex Funds finally answered the CFTC’s charges in court with a strongly-worded rebuttal which was filed on October 31st, 2023.
If MFF’s response is enough to win over the courts, prop trading firms probably carry on business as usual. If the CFTC prevails, prop firms – at least those that are US based – could cease to exist as we know them.
Considering what’s at stake, let’s take a long look at the MFF response. I’ve embedded the full PDF of the MFF response at the end of this article.
(A note: I have no legal background whatsoever – it’s been probably 10 years since I even watched an episode of Law and Order.)
Table of Contents
MFF strikes back
FIrst of all, I love the strength of this rebuttal. My Forex Funds (and their lawyers) did not pull any punches.
Just within the introduction section alone, they call the CFTC’s charges “nothing but a tall tale that fails under even the slightest scrutiny,” that relies on “nothing more than a handful of cherry-picked out-of-context quotations.”
MFF goes on to characterize the CFTC’s charges as “devoid of factual support,” “repeated misrepresentations” and “rank speculation.”
A few more particularly assertive quotes: “None of [the CFTC’s] allegations of materiality survive even the most basic logical scrutiny,” and “The CFTC’s allegations of fraud fail at every step.”
And, lastly, I always love it when a little creative writing works its way into a legal document, so my favorite line is this response to the CFTC’s attempts to use cherry-picked quotes: “In reality, this Frankenstein monster of spliced quotations does not exist on any of the pages the CFTC cites”
The CFTC has created a monster, a monster!
One of the keys to this entire case, and indeed to the future of the industry, is whether or not the CFTC actually has jurisdiction over prop trading firms.
For obvious reasons, MFF argues that the CFTC does not.
Clearly prop firms operate within the general financial services realm, which would suggest that CFTC oversight would be appropriate. However, prop trading firms have remained unregulated due to some technicalities that MFF spells out in this document.
Perhaps one of the most important distinctions is that prop firms don’t ever accept customer deposits. If they did, they’d clearly be subject to financial regulations. However, prop firm customers pay fees to open accounts, but they don’t maintain a balance of their own funds and are never placing their own funds at risk.
According to the MFF argument, this also means that customers aren’t engaging in real retail forex transactions. The logic is this: if the customers aren’t using their own funds, they aren’t themselves entering into any sort of transaction for forex contracts or any other financial instrument. Therefore, “No customer was ever party to any contract agreement to buy, sell, or trade any commodities, CFDs or foreign currencies.”
The big question now becomes whether or not the courts view what MFF’s customers did – buying and selling simulated forex and other financial contracts – as equivalent to buying and selling the real thing. If they do then some of the charges against MFF probably stick. If the court doesn’t treat these transactions as real, the CFTC’s jurisdiction in this case is immediately cast into doubt and MFF is probably off the hook.
“Standard across the industry”
This case will have significant ramifications for the entire prop trading industry in part because MFF has – for better or worse – put the standard prop trading firm business model itself on trial.
Basically, MFF defends a number of its actions by more or less saying “well, everyone else is doing it!” Of course they say it a little differently: “All of the relevant facts about MFF’s business model are fully disclosed and track common features in the world of forex prop firms.”
MFF uses this “industry standard” argument to justify registration fees, drawdown limits, the use of MetaTrader, bans on specific trading strategies, commissions, the distinction between A-book and B-book and which funds are used for trader payouts.
MFF is using the “everyone else is doing it” argument for two reasons. One, the CFTC is contending that MFF is a fraud, but if it is common knowledge amongst customers how prop trading companies operate, it is much harder to claim that anyone was criminally deceived.
Secondly, they are banking on the contention that prop trading firms aren’t subject to CFTC regulation. If the CFTC takes issue with drawdown limits, registration fees, and more, they should indeed shut down the entire industry.
Does the CFTC have the power and desire to do that? I guess we’ll find out.
“The CFTC’s failure” to speak to witnesses
One thing the MFF rebuttal has brought to light is a shocking lack of contact between the CFTC and seemingly anyone involved in this case.
It is hard to believe that the CFTC would take such drastic action as to completely freeze MFF’s bank accounts without actually conducting any interviews, but MFF cites “the CFTC’s failure, despite more than a year of investigation to speak to key witnesses…”
According to MFF, the CFTC never contacted any MFF employees or offered MFF any chance to respond to allegations. They didn’t even talk to the employees involved in the infamous “slip them to hell” conversation in order to understand the context. (More on that later.) Nor did they apparently talk to the customers that were affected by that conversation.
The CFTC also didn’t cite a single victim of MFF’s alleged fraud in their initial complaint. That doesn’t necessarily mean they didn’t talk to any customers, but MFF is right to assert that “the CFTC has not produced evidence of a single customer” who said they didn’t get paid out.
MFF also notes that of their hundred of thousands of customers, “only a handful ever voiced any dissatisfaction.” and the “CFTC has produced no evidence of any customer complaints.”
For the CFTC to claim MFF was a “large-scale fraud scheme” but then not cite any actual victims seems either lazy, sloppy, or disingenuous.
“Slip them to hell”
I was really curious if My Forex Funds was actually going to address the infamous “slip them to hell” quote. When the dust from this case settles, this quote might be the one thing that everyone remembers. I’ve seen it in countless memes, and it comes up every single day in just about every prop firm Discord or Facebook group I’m a part of. So I was particularly curious if MFF would respond to this quote on the record. Indeed they did.
The CFTC contends that this quote proves that MFF was actively working to manipulate prices in order to fail their traders. In their version of the story, an MFF official (finally revealed to be Joshua Dentrinos) identified a number of accounts that were using a bot (automated trading program) to profitably trade. He then approached the firm that managed MetaTrader for MFF and asked them to increase the slippage on those specific accounts. This was done, according to the CFTC, in order to limit these successful traders and decrease MFF’s payouts.
MFF provides a lot more context to this story. In MFF’s version, the bot that was being used was taking advantage of the simulated trading environment to make profits. “Gaming the system” in other words. So when Dentrinos said “slip them to hell,” he was simply trying to increase the slippage in order to remove the artificial price disparity that was leading to these ill-gotten profits.
Furthermore, MFF informed the account owners that slippage would be increased, and they paid out full profit splits to the bot owners despite their conclusion that these accounts were violating trading rules.
MFF also stated that any price manipulation they did – through increased slippage or other means – was done only to thwart traders who were taking advantage of the demo environment and using prohibited trading strategies. According to MFF, these accounts that were targeted for extra slippage due to suspected “exploitative trading” made up approximately .1% off MFF’s accounts.
I would guess that the real MFF is somewhere in between the CFTC version and MFF’s own self-depictions. I personally think MFF is probably closer to telling the truth than the CFTC is for one reason – MFF paid out hundreds of millions of dollars to traders, a fact that the CFTC does not dispute. If they were slipping everyone to hell, their payouts would have been far less.
Ramifications of CFTC vs MFF
However the courts decide, My Forex Funds will never recover. Regardless of the context, the quote “slip them to hell” will be forever associated with MFF, and the CFTC’s use of the words “fraud” and “Ponzi” won’t soon be forgotten.
MFF’s downfall obviously adversely affects CEO Murtuza Kazmi, whose assets were also frozen along with those of his company, and all the MFF employees, who very suddenly found themselves without jobs.
Many of MFF’s traders were also thrown in the lurch. All payouts were stopped, so any funded traders expecting a check didn’t get one. Refunds aren’t being processed, so anyone who just signed up is out their fees, at least for the time being. Traders on the verge of passing and finally getting a paycheck were locked out of their accounts. All their time and effort went down the drain.
That’s a lot of victims – many of them innocent – even if MFF is eventually found guilty of fraud.
Widening our scope, this case could very well decide the future of prop trading. The CFTC took issue with a number of practices such as drawdown limits, which are uniform across the prop trading industry. If these practices constitute fraud, all prop firms are committing fraud.
It would be a shame if the courts agree with the CFTC and the CFTC feels emboldened to shut down all American prop firms and lock out American prop traders. That would mean a lot of jobs lost and traders’ hopes dashed.
It does seem clear that some regulation of the prop trading industry is necessary – some firms are even more unscrupulous than MFF was alleged to be – but completely shutting down the industry would be a mistake, in my opinion.
The prop trading industry is far from perfect, but there are some great prop firms out there that give a person without capital the opportunity to earn a living as a trader. That’s not something government regulators should take away.
Full text of MFF response to the CFTC
Here’s a pdf of the full response from My Forex Funds, so you can download and read it yourself. Let me know in the comments if anything jumped out at you that I missed.