Social trading compliance in the EU

What are some of the platform features we can expect to see in the near future from regulation compliant social trading providers? Yael Warman, Content Manager at Leverate, takes a look in a special guest post.

Social trading, or crowd trading as it is also known, has become incredibly popular, experiencing tremendous growth in recent years.

Yael Warman, Leverate

Yael Warman, Leverate

Social trading makes investing easier for traders as they can watch and copy the strategies of more experienced traders, effectively increasing their confidence and activity. In an era of heavy competition and rising acquisition costs, social trading has the potential to increase trader engagement and loyalty, which in turn increases lifetime value. The possibility for brokers to increase their conversion and retention rates and lengthen traders’ active time with the implementation of social trading tools, has spurred the number of new brokerages offering traders access to social trading platforms.

The power social trading may effect on the industry, especially the fact that traders may begin to blindly follow the strategies of other traders with little or no understanding of the potential risks involved, has caught the attention of regulators across Europe.

Various European regulatory entities, in their ambitious reaching powers over the financial sector, began tightening the reigns over social trading aspects of the Forex industry, a process which culminated with the decision by the Markets in Financial Instruments Directive, MiFID, followed by local jurisdictions across the EU, to regulate social trading under the same outlines as they do portfolio management.

As regulators become stricter in their enforcement of regulation over social trading operators, platforms are beginning to morph in order to become compliant. What are some of the platform features we can expect to see in the near future from regulation compliant social trading providers?

1. Regulation compliant social trading platforms will provide all the necessary tools needed by a brokerage’s portfolio manager in order for him/her to be able to screen new traders and help manage their risk.

2. An accompanying risk profile for every trader would allow them to make investment decisions based on their risk aversion and or tolerance. According to how the trader is categorized in terms of risk, the system will set appropriate stop loss levels and help traders manage their risk.

3. Reporting tools in order to comply with the regulators’ requirements will allow brokers to easily prepare reports to submit to regulatory entities.

4. As part of the risk management guidance, traders will be matched with masters that best match their risk profile and will be guided towards achieving greater diversity by delineating the amount of funds to be allocated to each master, each instrument and social trading versus traditional trading.

5. Pre-set warnings will be displayed for each trader who is about to reach certain risk thresholds.

6. Advanced social trading platforms will provide traders with greater choices of investment by way of a cross-community feature, in which traders can have access to masters and traders of other regulated social communities. Brokers will also be able to connect MAMs, hedge funds, portfolio managers, etc, to the platform, hence giving traders a wider range of investment options.

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