Is Proprietary Trading Halal? Exploring Islamic Principles

Is it legal in Islam to do prop trading?

Prop trading is legal if the activity follows the Islamic law on trading in the financial market. This implies that usury, also known as riba, or unfair or exploitative profits, will be avoided. Foreign exchange transactions typically involve rollover fees or interest paid on positions held overnight. In Islam, these interest-bearing fees are forbidden. Moreover, investments in interest-bearing financial instruments or companies involved in such activities are regarded as haram since Islamic law prohibits paying interest.

Since prop trading allows for Islamic or swap-free accounts that follow Islamic regulations, it can be regarded as halal. All trading activity on these accounts is honest and open; there are no instances of fraud or deceit. The contracts' terms and conditions are precise and well-defined.

Best prop firms with swap-free accounts

1

9.4/10

Go to broker

Your capital is at risk.

Minimum deposit:

$1

Review

Topstep is an international proprietary trading company registered in the USA. The company has been providing financial services since 2012 and offers exclusive trading terms for clients from different countries. Topstep provides financing of real trading accounts of its clients if they prove the skill to make trades and manage risks on a simulation account. Traders can trade CME Group futures. Trading on real accounts is carried out through the ECN broker Equiti Capital.

Pros/Cons

•Real trading accounts are financed by a broker, there is no need to invest your funds in trading.

•The company provides a wide range of free training materials, including free group coaching.

•You can contact the support team using several convenient methods.

•The broker offers a referral program for extra income.

•The company doesn’t offer bonuses, automated trading, or other passive income options.

•The support service works only on weekdays during set hours.

Study Review

2

9.2/10

Go to broker

Your capital is at risk.

Minimum deposit:

€155

Review

FTMO is an international proprietary trading company created in the Czech Republic in 2014. The platform brings traders into its fold and after traders successfully pass a two-step testing regime, FTMO transfers 400 thousand dollars to the trader’s account. Transactions are monitored by FTMO to grow the deposit. There is a payment of 80% at the first stage of real trading. The 90% Profit Split is available only to those FTMO Traders that have reached Scaling Plan. The company works in full accordance with European financial legislation and is under the local regulator.

Pros/Cons

•Quite low testing cost is €155.

•Classic platforms such as MT4, MT5, and Ctrader are familiar to many traders. For these platforms, hundreds of indicators, scripts, and advisers have been developed.

•The starting reward is 80%.

•Diversification of tariff plans. Candidates can choose a demo deposit from 10 thousand to 200 thousand US dollars. There are tariff plans that span from standard to aggressive trading.

•Leverage is up to 1:100.

•Strict requirements for the test period. The allowable maximum loss is 10% of the deposit amount. The target profit is 10%, for which 1 month is provided.

•There is no information about how the company is funded.

Study Review

3

9.1/10

Go to broker

Your capital is at risk.

Minimum deposit:

$119

Review

Funded Trading Plus clients trade CFDs on currency pairs, indices, precious metals, energies, and cryptocurrencies. There are 18 programs with one- and two-phase challenges, or without evaluation. These programs also differ in initial fees, profit targets, maximum total drawdown, and other criteria. Traders can receive from $5,000 to $200,000 under management upon successfully passing the challenge or immediately if they choose the program without evaluation. Scaling up to $2,500,000 is available. The profit split is 80%/20% at the start and 90%/10% or even 100%/0% later. Traders work on MetaTrader 4 and MetaTrader 5. Leverage is up to 1:30.

Pros/Cons

•Wide choice of programs with universal parameters and acceptable requirements;

•One-time initial fee, refundable for programs with one- and two-phase challenges. No monthly subscription;

•Simple and understandable conditions, no hidden obligations, and profitable trading split;

•The prop firm partners with Eightcap and ThinkMarkets. It offers spreads from 0 pips and low trading fees;

•A demo account with $100,000 in virtual funds is available for exploring the trading process and instruments;

•24/7 technical support is provided via four communication channels;

•Deposits and withdrawals are made with Visa, Mastercard, bank transfers, and crypto wallets without fees.

•The Master program without evaluation is very expensive — a non-refundable initial fee of $4,500 is required for the balance of $100,000;

•Funded Trading Plus offers only CFDs without real assets or futures;

•The firm’s website contains much information, but some important nuances, like the reset fee, are not provided.

Study Review

What Islamic authorities say about prop trading

Prop trading is different from trading on brokerages because it is just a kind of trading where traders do not have to use their own money to trade. While some of these prop firms allow traders to trade on popular trading platforms, they also offer Islamic accounts that comply with Islamic law.

Under Islamic law, trading instruments in the financial market are supposed to adhere to the Islamic principle: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, salt for salt, like for like, same for same, hand to hand. If the types are different, then sell however you like, so long as it is hand to hand.” Therefore, any trading activity that disregards the law is haram.

From this point of view, any market deal that initially contains at least two conditions: the opening price and the closing price, is already illegal.

How to keep prop trading halal?

Islamic finance specifies the requirements that must be met to keep prop trading, also known as proprietary trading, halal, or acceptable by Islamic standards. Here are some key principles to follow:

• Prop trading operations should not include interest-based transactions due to the Islamic prohibition against interest (riba). This entails avoiding dealing in interest-bearing securities or signing contracts that have set interest rates.

• Steer clear of companies engaged in gambling activities.

• Prop trading should incorporate profit-loss sharing and risk-sharing agreements in which gains and losses are distributed fairly and equally amongst participants.

• Ensure you employ risk management techniques like setting stop-loss orders to reduce the risk of asset trading.

• To reduce the risks associated with a single stock or market, diversify your holdings in your portfolio.

• Examine the companies' fundamentals before investing to ensure their operations adhere to halal standards.

Alternative Investment Options for Muslims

For Muslims seeking alternative investment options that comply with Islamic principles, several possibilities exist beyond traditional interest-bearing instruments. Here are some alternative investment options:

• Invest in the stock of companies that are involved in halal industries, such as consumer goods, healthcare, technology, and renewable energy.

• Investing in exchange-traded funds (ETFs) that adhere to Shariah regulations offers a simple way to invest in a wide range of stocks while respecting Islamic finance principles.

• Invest in Sukuk issued by governments, corporations, or financial institutions to earn returns in a Shariah-compliant manner.

• Trade with swap-free (Islamic) accounts offered by some Forex brokers. Invest in commodities like gold, silver, and other permissible commodities.

Expert opinionAndrey Mastykin

Author, Financial Expert at Traders Union
It takes a thorough understanding of the tenets and regulations of Islamic jurisprudence (Shariah) to determine whether proprietary trading is halal (permissible) in Islamic finance. In Islamic finance, it is prohibited to engage in transactions that involve any degree of uncertainty (gharar), speculation (maisir), or interest (riba). Trading in companies that partake in haram activities, like the sale of pork, alcohol, or gambling, would be prohibited. Following these tenets, proprietary trading might not be intrinsically prohibited, but the particulars of its execution would dictate whether it is.

Trading in permissible (halal) assets is allowed in Islamic finance. Therefore, trading in stocks of Shariah-compliant companies, commodities like gold and silver, or currencies following Islamic principles may be considered halal.

Most of the time, the intent of the trader or investor makes prop trading halal or haram. The purpose of the trade is important; trading that is done for speculation or gambling is forbidden, or haram. Nonetheless, trading might be allowed if it is done for investments and wealth creation. This implies that the trader needs to reduce risk and make decisions based on solid analysis.