Social trading innovators share perspective On MAM accounts following regulatory considerations by FCA
Further to last week’s revelation by Britain’s Financial Conduct Authority (FCA) regarding its intention to set forth a regulatory structure for copy trading and social trading platforms, deeming them investment managers, the question remains as to whether this framework will apply to social trading platforms only, or whether managed FX accounts, operated by portfolio managers, such as PAMM accounts will also fall under the auspices of regulatory authorities, with the individual or company charged with the responsibility of trading on behalf of investors also being considered a financial advisor or investment manager and having to perform the required checks and balances usually associated with compliance departments of financial services companies.
One particular company which has a substantial amount of specialist knowledge on this matter is Strategy Store, which is headed by CEO and co-founder Dmitry Orlov, a senior industry professional who is widely credited with the invention of the PAMM account itself, during his tenure at Alpari a number of years ago.
Daria Timoshchuk, COO and co-founder of Strategy Store, elaborated on the matter in an interview today with LeapRate, explaining that “With regards to PAMM, I don’t know any examples of these operating as a service for non-licensed managers in regulated jurisdictions, since PAMM is actually portfolio management.
Ms. Timoshchuk did, however, outline certain business models that differentiate PAMM from social trading by stating to LeapRate that “There is one practice within the industry that we are aware of, in which any said company can launch such a service under its portfolio management license, whereby its portfolio management department is intended to be responsible for all the strategies within its scope, including supervising them and taking responsibility for them, as though they are the actual strategies of the FX company itself.”
“In this circumstance,” continued Ms. Timoshchuk, “the company concerned has to define a risk profile for each client, and decide on the suitable list of strategies for each client in accordance with the rulings on portfolio management in the particular jurisdiction in which the company concerned operates.”
“As an example, according to the regulation, a portfolio manager cannot offer the full scope of strategies to all clients. Instead, the clients should be classified by their attitude to risk and experience, and a suitable portfolio should be made up for each of them according to this classification” she concluded.
Ms. Timoshchuk confirmed to LeapRate that Strategy Store had been anticipating the onset of regulation, therefore the company has implemented the client categorization principle into its platform.
A controversial view was taken today in an interview with LeapRate, during which an experienced industry professional specializing in this particular shared his line of thinking with LeapRate, stating that “The general impression about FX is that it is suffering from a massive conflict of interest, more of a gambling industry than financial services because the broker/dealer model is OTC with retail counterparties.”
Whilst this industry source, who elected to remain anonymous, considers that there is nothing wrong with the broker dealer model with informed counterparties, he holds the view that the solution is to ban FX broker dealers from operating a model in which managed accounts can be operated.
“Retail order flow should be only allowed on a full mass principle, or true STP basis. There should be no principle of b book at all. This can only be achieved by instigating an exchange model and encouraging clients to profit and generate external commissions for the market participants, without any possible method of controlling prices or operating a b-book.”
“Stopping short of banning the existing model, there is a possibility to run into all sorts of ramifications of conflict of interest” he continued.
Drawing comparisons to a rather less salubrious industry, this particular industry professional stated that “If you look at social trading, it is like a gambling slot machine that is not generating enough, so companies make other steps to make clients trade more and lose their money quicker such as encouraging them to follow other traders en masse, until all the client money is lost.”
“If the lead trader must hold a managing position, then mirror trading is effectively a sort of inter broker PAMM account. If the FCA is interested in considering money managers having to be regulated as such, and steps are being taken toward regulating inter broker PAMM accounts, then this logic to be applied to intra-broker PAMM accounts, which means that the trade leader within social trading networks should hold a managing position.”
” For the managing position, it is essential that the individuals selected have proven knowledge, a clean record, a regulatory team including a compliance officer, as well as 50,000 Euros in Escrow to cover any error. There is no way 99% of today’s PAMM account managers have this structure.”
“The other ramification of this is that if these PAMM leaders introduce investments to the broker, the brokers want to give kickbacks on the money managed by own investors. This is a pure conflict of interest as the broker fudges the prices, then charges extra commissions which the broker shares with the IB who is also an investment manager. I do not agree with this model, the PAMM account manager should only receive fees on a success basis and should not be treated as an introducing broker” stated the intrepid source.
“As far as regulatory auspices are concerned, it was pointed out during this particular industry insider during today’s interview that “The Financial Conduct Authority should clamp down on it. Whilst it is tempting to draw comparisons between the social trading networks, EAs and PAMMs of today with the financial adviser of the 1980s who came to visit clients and took commission for placing business with different firms, the difference is that today there is a larger amount of informational asymmetry, and intellectual property which was not there in the 1980s” he continued.
“If for example, you are a very good retail trader and are trading 2000 euros on a strategy that wins consistently, on FX which is the most liquid market, and then I act as a dealer, and I have 5 million Euros in capital, and then I see your trades and replicate everything you do, then there is no possible means of you turning a profit. This is a good reason to ban FX broker/dealers from engaging in this practice.”
“If using the information asymmetry, then you know what the customers are doing but they do not know what each other are doing, therefore there is a principle/agent conflict of interest. Subsequently, if customers successively lose money, then broker/dealers b-book them to keep them on board. The only way to make it so that nobody has advantage is to do it all via an exchange” he enthused.
In conclusion, this particular source wrote the current situation down to resembling “a poker game where the person handing you the cards has marked all the cards, so there is no chance of winning. Therefore, the regulatory authorities are quite correct in investigating better means of doing business, which in turn will serve to create a more sustainable long-term model.”