Prop Trading in the European Union - why the model keeps growing

Three years ago prop trading was a niche occupied by a few dozen firms. Today there are several hundred in Europe, and new ones launch every month. Founders asking about it increasingly have no background in financial markets at all: software house owners, online creators, e-commerce companies. The reason is simpler than it looks.

What you'll learn from this article:

1. Where the sudden growth of prop trading in Europe came from
2. Why simulation, rather than real trading, is the basis of this model's legality
3. What the real legal risk of running a prop trading platform is – and why it isn't financial supervision
4. How to draft your terms and conditions and marketing so they don't contradict the structure of the service itself

Where does the boom come from?

Three things converged.

The first was ESMA's 2018 product intervention and the national measures that followed, capping retail CFD leverage at 30:1 on major currency pairs and 2:1 on crypto-assets. Demand for leverage did not disappear. It moved to where the caps do not apply – because there is no real instrument there.

The second is speed – the speed of setting up a platform and launching it together with payment integration, which takes a few weeks at most.

And finally, the most important thing for entrepreneurs: money, specifically the revenue structure. Prop trading firms do not earn from markets. They earn from challenge fees. Revenue is predictable, margins are high, and working capital requirements are modest, because payouts are rare events – firms report that around 2–5% of participants reach funding, and 40% of funded traders receive a payout, meaning only about one to three in every hundred participants ever gets paid. Financially, this sits far closer to a subscription business than to anything investment related.

How Is It Legal? The Simulation Is Not an Obstacle – It's the Main Reason

Prop trading has acquired a reputation as a grey zone. It is not.

In September 2023, the Czech National Bank issued position RS2023-18, stating expressly that trading conducted solely on a demo account, without real execution and settlement of orders, does not constitute an investment service. The ČNB also accepted that such an account may be linked to a cash prize. The position was issued under the same MiFID II framework that Poland and the rest of the EU implemented.

The mechanism is straightforward. Every brokerage activity listed in MiFID II shares one common denominator: its subject matter must be a financial instrument. If an account mirrors market prices but generates no order, no transaction, and no settlement, there is no instrument – and without an instrument, there is no brokerage activity. There is also no licensing requirement.

There is, however, a caveat the ČNB added, and in practice it decides everything. The conclusion does not extend to arrangements where the participant is entitled to remuneration dependent on the trading results achieved on the demo account. Such an arrangement must be assessed against the rules on derivatives. That is a precise description of the profit split used by the entire industry.

The conclusion is uncomfortable but useful: what you call the product is irrelevant to the legality of prop trading. Compliance follows from how consistently you maintain that nothing real is happening. What matters is the actual structure of the service and the marketing, integrated with the provisions of the terms and conditions.

Why Isn't the Financial Regulator the Real Threat?

Almost every entrepreneur with a prop trading idea asks about the financial supervisor. Nobody ever worries about the consumer protection authority. In our audit practice, it is consumer law that generates the most severe and the most probable exposure.

The reason is structural. You are selling a digital service to consumers in a dozen or more countries, at a distance, at prices ranging from several hundred to several thousand euro. Each of those countries has its own consumer regime, and a company registered in Slovakia, Cyprus, or the UAE does not escape it through a choice-of-law clause. Article 6 of the Rome I Regulation provides that a choice of law cannot deprive the consumer of the protection of the mandatory provisions of the country of their habitual residence.

Whether a platform falls under Polish consumer law is decided not by the company's registered office and not by the server location, but by whether you direct your activity to Poland. A Polish-language version of the service (even a rough machine translation), Poland on the country list at registration, and so on – each of those elements is independent evidence that you are targeting Polish users. The same logic applies to every other market whose interface you have translated.

A Real Problem and a Simple Solution

The entire legal construction of prop trading rests on the proposition that the user is not trading. Meanwhile, interfaces routinely use keywords such as "position", "leverage", "margin", "liquidation price", and landing pages promise that the user will "earn up to 80 percent of the profits". That contradiction shows up in every legal audit, and it is the first thing a regulator will reach for.

Adding interpretive clauses to the terms and conditions will be critically important for the regulatory classification of the activity and for marketing communications. An example provision I recommend:

"Use of the terms 'transaction', 'order', 'position', 'leverage', 'profit', 'payout' or similar expressions within the Service constitutes solely a functional description of the simulated evaluation environment and must not be interpreted as a reference to real trading, order execution, brokerage, investment, crypto-asset, custody or payment activity."

Watch out too for interface strings which platforms often copy from crypto portals or from each other, and which contradict the fundamental premise of prop trading. The terms contain provisions stating that the service is a simulation, that there is no real market, no deposit, no client capital, and no derivative instrument. Yet a copied pop-up window with a line such as "upon liquidation you may lose your initial margin deposit" misleads the consumer, and it is precisely that string which will be decisive before the consumer authority.

One final example on marketing consistency: if you prohibit affiliates from presenting the service as an investment opportunity while your own homepage compares "traditional trading" with "simulated trading" in favour of the latter, you are applying a lighter standard to yourself than to your partners – and the regulator will catch that immediately.

FAQ

1. Does prop trading require a financial regulator's license? No, as long as the account operates purely in simulation mode – without real order execution and settlement, there is no brokerage activity under MiFID II.
2. What determines whether a prop trading model is legal? Consistently maintaining, both in the terms and conditions and across all marketing communications, that nothing real is happening.
3. What is the biggest practical legal risk for prop trading firms? Consumer protection law risk, not financial supervision – arising from selling a digital service to consumers in multiple countries at once.
4. Does choosing foreign law in the terms and conditions protect a firm from Polish consumer law? No – under Article 6 of the Rome I Regulation, a choice of law cannot deprive a consumer of the protection under the law of their country of residence if the activity is directed at them.

If you want to build a professional and legally sound prop trading platform in Europe and beyond, write to me.