Many prop firms have decided to move away from CFDs and instead offer trading challenges on exchange-traded markets such as futures. Read on to find out the advantages of such a move, how it came about, and what prop firms need to be aware of before taking the leap.

What are the advantages of futures prop trading over CFD prop trading?

Futures have several advantages over CFDs in terms of transparency, regulation, trading costs, and tax efficiency that have made them more attractive to prop traders.

Price transparency

CFDs are traded over the counter, which means there’s no single reference price feed for any underlying asset or symbol, and no real order books. Futures, on the other hand, are exchange-traded, which gives them that extra transparency.

This means there’s no ambiguity about how futures prices move. This sense of transparency is a major selling point for prop traders participating in challenges, as their performance depends on objective prices that are the same for everyone in the market.

Stricter regulation

Futures are also a highly regulated instrument, which lends them more credibility in the eyes of traders than CFDs. CFDs are currently banned in the US, with regulation outside the US fragmented, at best, with certain “strict” jurisdictions such as the UK, EU, and Australia, and other jurisdictions regarded as “loose”, such as Vanuatu, Seychelles, and St. Vincent and the Grenadines.

No hidden trading costs

While CFDs are commission-free, spread markups imposed by brokers (the difference between the cost of buying and selling) and overnight financing fees can significantly increase actual trading costs.

Futures markets do feature commission fees, but these fees are standardized and fully transparent, making it much easier for traders to calculate the true cost of their trading activities.

Tax efficiency

Futures trading is generally regarded as being more tax-efficient than CFD trading. In the US, futures trading is taxed at 60% as long-term capital gains and 40% as short-term capital gains, while CFD trading is illegal and therefore not eligible for exemptions.

In other parts of the world, tax rules can vary significantly. However, the general pattern is that futures trading is taxed as capital gains, while CFD trading is taxed as income. In the EU, CFDs and futures are legally classified as derivatives and taxed accordingly.

Why did many prop firms stop offering trading challenges on CFDs in 2024?

Prop trading provided a loophole for CFD trading in the country due to the fact that trading challenges are conducted on demo, with no money changing hands other than the fees paid to access those challenges.

Prop firms at the time offered access to CFD trading mostly through “gray labeling” specific platforms as their license holders.

When the providers of these trading platforms made license holders withdraw support for proprietary trading firms early in 2024, prop firms were either forced to find another platform provider or to change their offering entirely.

Many migrated to other providers, such as our own DXtrade platform. However, regulatory uncertainty around CFDs has led to bans on advertising and even the ability to deploy mobile apps in Apple’s App Store and Google Play. This has led many industry participants to start exploring other instrument choices, such as futures, and searching for viable futures prop trading platforms that could support their business model.

Why did platform providers decide to force their license holders to stop supporting prop trading firms in 2024?

The company has not made its reasons explicit. Apple abruptly removed the providers’ apps from the App Store on September 23, 2022. The ban lasted for nearly 6 months until the dispute was resolved, and Apple reinstated the apps on March 6, 2023.

The platform providers’ move appears to have been aimed at protecting their own interests. The companies restricted access to their platforms in the US and seem to have been trying to prevent US traders from accessing them via existing license holders partnering with prop firms that engage US traders.

Moreover, 95% of the accounts on these platforms used by prop firms were demo, meaning that the platform providers did not stand to benefit financially from their popularity as prop trading platforms while simultaneously being exposed to regulatory scrutiny.

Why are futures a good fit for prop firms moving away from CFDs?

When the prop trading industry began pivoting away from CFDs for trading challenges, futures were an obvious alternative.

Like CFDs, futures are derivative instruments that allow traders to speculate on a variety of assets without taking physical possession of the underlying asset. Also, like CFDs, futures positions can be rolled over continuously, though the rollover in CFDs is performed automatically, while futures require the existing contract to be closed and an identical one to be reopened for a future expiration date.

Most importantly, futures offer access to a wide variety of markets, including stock market indices, FX, precious metals, energy, agricultural commodities, interest rates, and crypto. This provides prop traders with many options as to how to pursue their trading goals.

Retail brokers that had traditionally offered CFDs worldwide successfully pursued this path when they completely rebuilt their product offering in the US following the CFD ban.

Options are rapidly becoming the new frontier in retail prop trading. As an instrument, options offer many of the same benefits as futures for prop traders. They are highly regulated, transparent, available across a wide variety of underlying asset classes and symbols, and highly capital-efficient.

Options trading, in general, has seen a surge in popularity over the past decade as it has become available to retail traders. This popularity is leading many prop firms to realize there’s strong product-market fit for prop options trading, driven by increased retail participation in options and the growing popularity of retail prop trading.

At the moment, there are not many options prop trading platforms that can handle both the complexity of options trading and the numerous integrations that prop firms require for the running of their trading challenges. DXtrade is a platform with pre-built integrations with prop trading competition software and a pedigree of use by futures and options traders.

What do prop firms need to consider when offering futures and options markets?

As exchange-traded products, futures and options are more complex than CFDs in terms of their requirements. Futures prop trading platforms and options prop trading platforms have instrument-specific requirements in terms of market data provision, trading tools, and risk management procedures.

Additionally, market data for exchange-traded products, unlike CFD OTC pricing, requires licensing.

They require real-time order management with the ability to calculate complex SPAN margin requirements, as well as pre-trade validation to ensure these requirements are satisfied. Post-trade monitoring is also more complex, with portfolio-wide liquidation required in the event of adverse market moves.

Market data is not just limited to asset price feeds, but must include information on contract specifications and expirations, as well as Greeks calculations in the case of options. Real-time Level 1 and Level 2 pricing data is also a must, as is depth-of-market ladder trading.

Why DXtrade is the platform for prop firms looking to offer futures and options

DXtrade has proven itself as a highly capable and flexible trading platform for futures and options brokers, offering all the above, as well as the ability to easily integrate with a variety of third-party software, including prop trading operations software.

Most importantly, though, DXtrade allows prop firms to offer prop trading challenges on futures, options, and ETFs, all from one single interface, effectively making a multi-asset offering in one package.

When you factor in the ongoing 24/7 support offered by Devexperts, as well as enterprise-grade market data via our sister company, dxFeed, it becomes clear that DXtrade is a prop trading platform that’s difficult to rival.