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So I’m trading real money now, right?

Well… maybe.

Nearly all trading evaluators start new live traders in “live simulation”. In some cases, this is totally evident… you’re logging on to the same simulated data server that you were during evaluation!

With some evaluators, once you’ve generated a certain level of profit in your account, you may be switched to a “live” account with different login credentials. This will be a real account at a futures brokerage.

Aside from the server that you’re connecting to, it’s very easy to tell if you are trading “live” in a “live sim” or a real account. If you place a limit order and the market depth at that price level doesn’t change, your order’s on a simulator and not in the live market.

Does this matter? It’s an interesting question. If you look at the marketing messages from trading evaluators stating “we have paid $x,000 this month to our funded traders”, it’s quite clear that the bulk of their profit comes from evaluations, not from profit shares with funded traders. That’s the nature of trading. The majority of traders lose money. 

So why would a trading evaluator put a “funded” trader on live sim rather than in a cash account? It’s because most “funded” accounts fail very quickly. If you have this information, why would you put actual funds at risk? The low percentage of “funded” traders that are profitable can be switched into real accounts once they’ve shown an ability to generate profit safely and consistently. This typically happens once a residual level of profit, generally equal to the account’s drawdown, has been generated. In reality, the trader is building their own profit cushion and trading from the profits they have generated.

The evaluation profits (and live account administration fee profits) from failing traders are covering the simulated trading profit payout liability that the evaluator is carrying from profitable live traders. As most evaluation attempts fail (and reset, and reset) and many live accounts fail quickly too, the risk for the evaluator is lower by not placing traders that have passed evaluations directly into real, cash-funded trading accounts. In some cases, evaluators will copy the trades made in live sim accounts into the actual market to generate similar trading profits to those generated by the trader. This is transparent to you as the trader however.

Let’s be clear though… a trader in a new “funded” live sim account that is generating profit is almost certainly a cost liability to an evaluator at first, and not a profit generator.

That’s the business model. Again, does this matter? The prevailing risks for you as a trader are:

  • Is the evaluator’s business model right?
    If you request a withdrawal of generated profits, will they pay? We think this is low risk. The reputational damage for any of these companies by not paying out legitimate profits is high.You have no reason to care whether you are trading in “live sim” or the actual market (unless you have a trading strategy that relies on your queue position in the limit order book). The reason you’ve taken a trading evaluation is to generate profit from trading with less of your own capital at risk than if you were to open a trading account.
  • Changes in exchange regulations.
    The strange thing about the “live sim” situation is that (paid for) market data is being used but the trades are not entering the exchange. The exchange (and NFA) are not receiving their fees for the simulated trades. Using underlying exchange data to make a market in another product is what CFD brokers do. CFD trading is banned in the US. Paying out from “live sim” accounts is not a direct parallel to CFD trading as the trader isn’t incurring any cash losses from losing trades. The whole account is simulated.This situation is a very grey area. Perhaps the CME will look at the loss of fees from “live sim” accounts and impose rule changes around this type of operation. Perhaps the CME will operate their own simulated environment. Perhaps the CME will contact every self-certified non-professional trader to check whether they do have a funded trading account? Perhaps the CME will regard the genie as being out of the bottle and retrospectively change their rules? Who knows…

We’re not making any judgement on this state of affairs. It’s important however to fully understand the shape of this business model so that you can take an informed view on changes that may occur within it. As a trader in a prop firm, one’s risk is always whether one can withdraw funds. Trading evaluators are on the distant fringes of prop firms and one must be considering whether there’s any significant risk to not being able to access the profit generated over time from trading within this framework.

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