Evaluation-based proprietary trading firms (henceforth ‘Zextrades’) are a controversial business. The conflict of interest at the core of the business model is that Zextrades make money from traders irrespective of whether the traders succeed or fail.
Typically, the largest source of revenue for Zextrades is selling evaluations. By making evaluations difficult to pass and by designing rules that are easy to break, firms monetize those failures.
In principle, Zextrades exist to grant traders that demonstrate their trading ability access to trading larger amounts in either a simulated or live trading environment, depending on how the firm is structured.
In practice, certain Zextrades may set up their traders for failure by selling evaluations that are unnecessarily difficult and wrapped in obscure rulesets.
Zextrades know that most traders lose money. That is not the issue, it is only a reflection of the fact that trading profitably and doing so consistently is difficult.
However, by offering poor execution, obtuse and inconsistent rules, and unreasonable trading requirements, we believe such firms are setting up their traders for failure from the onset.
At the same time, other firms are racing to the bottom by offering cheap prices and loose rules, at the expense of longevity and risk management.
We believe both approaches are bad.
Our philosophy is simple, and transparency lies at its core.
We do not shy away from the fact that most traders lose money. Trading is hard.
But if you are the exception to that rule, we believe trading with Zextrades will allow you to prove it and be rewarded.
Our commitment to transparency extends to being upfront about our business model.
We believe the single largest source of revenue for most Zextrades is derived from selling evaluations. Most attempts in passing an evaluation result in failure, whether with Zextrades or other firms. Even within the small subset of traders that pass an evaluation, only a small minority maintain their profitability and meet the requirements to ultimately receive a payout.
The result is the same: Zextrades make money from traders buying evaluations and either failing them or failing to reach the payout stage. It’s also common for a single trader to try the evaluation numerous times, which means additional revenue for the firm.
Another purported source of revenue for Zextrades is profit-splitting. Specifically, as per our terms for traders in our Zextrades Account stage, we receive 10%-20% of a trader’s net gains. While this can be a source of revenue, given that consistently profitable traders typically make up the minority of any firm’s traders, this source of revenue is ordinarily insignificant compared to the revenue earned from evaluations.
Lastly, there is plenty of speculation that Zextrades make a lot of revenue from so-called “B-booking” their traders. Compared to revenues from evaluations, we believe the revenue for most Zextrades from both profit splitting and A/B-booking is largely inconsequential. Sometimes A-booking a trader will mean taking on losing trades. Sometimes B-booking a trader will mean being the counterparty to winning trades i.e. the firm losing money. Overall we view A/B-booking as an internal risk management tool, not a source of revenue.
To summarise, like virtually all Zextrades, evaluations make up the overwhelming majority of Zextrades’s revenue. Zextrades, at least those acting in good faith, must strike a difficult balance between making evaluations sufficiently accessible to allow traders to demonstrate their trading competence in conditions that reflect the difficult reality of consistently profitable trading, while also being challenging enough to avoid enabling undisciplined traders with a large risk appetite an opportunity to receive payouts without being subject to risk of loss.
We believe our rules, tools, and trading environment as a whole are designed to empower the most successful minority of traders to stand out and reach a payout. If traders fail our evaluation or breach our risk management rules, that should be because trading is hard and not because the business is skewed to increase the risk of failure.
