“To the best of my knowledge, ESMA is not currently engaged in any substantive discussions regarding retail prop trading,” Dr George Theocharides, CySEC’s Chairman and ESMA’s Chairman of Risk Standing Committee, told Finance Magnates.

It was only two years ago when Paris held discussions for the first time about oversight. A popular opinion in the market was that retail prop trading would be swallowed by MIFID II, specifically under the provision that governs traditional proprietary trading.

Just a year ago, Theocharides mentioned that retail prop trading was “on the radar.”

But now, it appears that the market has moved down the regulatory pecking order and out of the discussion.

ESMA itself did not wish to comment on the matter.

“While the topic may be monitored as part of broader market developments, it does not appear to rank among the Authority’s immediate priorities, given the relatively limited size of the sector,” Theocharides explained.

However, the market’s shifting landscape might soon necessitate a return to deliberations.

For one thing, retail prop trading right now is booming.

Over 1,050% Search Interest Increase in Germany

Data from Google Trends reveals a significant spike in search interest across the UK, US, and Germany over the last five years.

Germany witnessed an explosive over 1,050% surge in search queries for “prop firm,” with February 2026 being the highest point, representing a massive surge in public curiosity that dwarfs all previous years.

This absolute fever pitch is seen worldwide.

The growth is being fuelled primarily by Gen Z and millennials, who are drawn to the chance to trade with significant capital without risking their own savings.

In the 2026 edition of Deloitte’s Fast 50 for the Middle East and Cyprus, which ranks the fastest-growing tech companies in the region, two prop firms, Funding Pips and FundedNext, were included.

Even if this growth persists and the market swells enough to draw Paris back in, regulatory inertia may also reflect a simpler fact: the business model exists in a legal grey area.

These firms are not financial institutions. They are simulation platforms, or as the label suggests, educational institutions.

However, the industry is undergoing a structural shift that departs from that label.

Some 100 Prop Firms Closed Between 2024-25

Increasingly, the retail prop firm and the regulated brokerage models are merging.

Prague-based prop trading giant FTMO has bought retail broker OANDA; prop firm The Trading Pit launched CFD broker TTP Markets; and major Australian broker Axi introduced its prop arm Axi Select. We have also seen retail broker ATFX launch ATFunded.

And so on.

This trend is born out of necessity. MetaQuotes had forced the industry’s hand back in 2024 when it revoked access to MT4 and MT5 licenses from prop firms, and forced retail brokers that were renting server space to prop firms to drop them as clients or lose their own access.

The extent to which regulatory intervention influenced MetaQuotes’ crackdown remains difficult to quantify. However, when the CFTC, the US regulator, initiated its 2023 raid and asset freeze against My Forex Funds, which facilitated simulated trades via MetaTrader software, it served as a definitive shot across the bow.

After MetaQuotes laid down the law, prop firms had to migrate to alternative platforms or buy actual broker licenses.

According to FM Intelligence, between early 2024 and late 2025, it is estimated that up to 100 prop firms ceased operations, wiping out nearly 14% of the market.

Indeed, the MetaQuotes incident was a major catalyst for the wipeout. But, it also exposed an uncomfortable truth about the market’s economics.

Statistics from FPFX indicate that only 7% of prop traders who purchase a challenge successfully secure a payout. Consequently, many firms rely heavily on a steady stream of evaluation fees from the 93% who fail to cover their operational expenses and pay out successful traders.

It is ironic that for an industry that markets its services as educational, it is remarkably efficient at ensuring that prop traders learn only how quickly an entry fee can vanish.

Nonetheless, this business model creates a glaring vulnerability where a decline in new registrations could trigger a liquidity crisis. ATFX recently paused its ATFunded operations, noting the need to assess whether the model is sustainable for the long term.

At the same time, with hundreds of copycat prop firms flooding the market, competition became cutthroat. Firms began trying to out-advertise each other by offering unsustainable perks. Add to that the fact that prop firms are highly vulnerable to exploitation by sophisticated actors who know how to game the system.

Apart from large prop firms with deep pockets, the model is not easy to sustain for the rest.

The combination with retail brokerage, then, creates a funnel: the prop firm attracts beginner traders through low-cost challenges, with the ultimate goal of converting them into traditional retail clients who trade with their own money on a regulated platform.

Before hitting the brakes, ATFX reported that it had converted over 10% of its prop traders into brokerage clients in South America.

FundingPips, on the other hand, lets prop traders move their rewards to Tradin, its regulated broker, and receive a 30% trading bonus on top.

This hybridisation poses a regulatory dilemma: can a retail prop trading firm still be called an educational entity if it survives by acting, in effect, as an Introducing Broker (IB) for its own regulated brokerage?

It’s worth mentioning that a substantial segment of the market has acquired licenses for their brokerages in jurisdictions with lighter oversight, with Mauritius being an increasingly popular choice.

Prop Trading in the US is Moving Toward Regulation

While Europe appears to have shelved discussions about regulation, the view from the United States suggests that a crackdown may be approaching.

Large American prop firms are already beginning to seek registration with the CFTC, the competent authority.

The CFTC’s actions against My Forex Funds may have loomed large in the market’s mind, prompting a better-safe-than-sorry approach.

Major players like Topstep are now registered IBs, which allows them to pass client orders to a Futures Commission Merchant (FCM) for execution and clearing – for example, Plus500 acts as Topstep’s FCM.

There is a similar requirement under MiFID II rules, where a firm generally needs a Reception and Transmission of Orders (RTO) license to route client orders for execution and earn commissions on those trades.

But there has been no indication that prop firms in the Old Continent are going in that direction.

The Drags of Regulatory Ambiguity

The current situation is creating some bizarre situations.

Crypto Fund Trader, a Switzerland-based firm, recently posted an alarming announcement on social media claiming an “unauthorised transfer of funds” and a security breach at their office.

Footage of a supposed break-in circulated online, causing a brouhaha in the community. At the end, though, the firm revealed the entire incident was a staged marketing stunt to promote a new account type.

Under MiFID II, such tactics would likely be flagged as the rules prohibit marketing that misleads clients or creates unnecessary alarm.

The lack of oversight also contributes to a significant information gap.

On Reddit, many novices appear to believe they are managing a firm’s actual cash. The promotional language used by many firms, terms like “Funded Account” or “Professional Trader,” implies real market access.

This might have also contributed to the fever pitch in search queries in 2026.

When beginners do not realise they are in a simulated environment, they cannot accurately assess the risks involved, particularly the risk that the firm may not have the liquidity to pay out their winnings if they are successful.

It would be interesting to see whether the drive by ESMA to clamp down on “aggressive marketing” will provide another catalyst for bringing the retail prop sector back into the regulatory fold.

Finance or Gaming?

If you pay a fee to enter a challenge, follow a strict list of complicated rules and receive a prize if you win, you are describing a structure that sounds more like a casino-like game than a financial investment.

Italy’s financial regulator, Consob, explicitly warned in 2024 that prop firm websites promote exercises that “simulate online trading in a type of finance video game.”

Market stakeholders previously echoed this sentiment during ESMA’s initial deliberations on oversight, asserting that the gaming regulatory frameworks represented the necessary trajectory for the sector’s evolution.

If such a distinction holds, this would also blow a hole in the market’s “education” label. Still, other than warnings, there has been no indication that regulators are actively moving to reclassify retail prop trading.

For the time being, the regulatory stalemate will probably persist.

It may very well take a significant scandal or a high-profile incident similar to the My Forex Funds case to bring prop trading back into ESMA’s radar.

This article was written by Adonis Adoni at www.financemagnates.com.Retail FXRead More

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