Where is Regulation Taking Social Trading?

The need for a cross-community regulated social platform is becoming essential for brokers to remain competitive.

This article was written by Yael Warman, Content Manager at Leverate.

As the EU regulatory entities have become increasingly ambitious in their powers over the financial market, the legal framework under which social trading is considered has dramatically changed.

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CySEC

CySEC, a regulatory body that was for years considered lax in its approach to FX regulation and enforcement, has tightened the reins on various aspects of the forex industry, including the decision back in 2013 to incorporate social or copy trading under the laws applicable to portfolio management. This somewhat recent determination has been drastically overhauling the social trading landscape.

Considering the fact that social trading has exhibited tremendous growth since its inception a little over 10 years ago and continues to grow in leaps and bounds with significant adoption in the past year or so, paired with regulators’ increasingly strict enforcement, the need for a cross-community regulated social platform is becoming essential for brokers to remain competitive.

To take a look at where the industry is going, we asked Gadi Rosenfeld, Leverate’s social trading expert, for his view on what we can expect to see in regulated social trading platforms.

“Since social trading became categorized as portfolio management under EU regulation, we have spent countless resources in making sure our social trading platform is fully regulated so it can enable brokers to gain a competitive advantage”, said Gadi.

Features

According to Mr. Rosenfeld, some of the features we can expect to see in the most advanced social trading platforms are:

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– For brokers, a robust and regulated social trading platform will provide the portfolio manager, the necessary tools to screen traders and help manage their risk.

– For traders, the regulated social trading platform will categorize them according to their risk aversion, determine appropriate stop loss levels and help them manage and/or limit their risk.

– For the regulator, the regulated social trading platform will provide the tools needed to prepare the reports required.

– Advanced social trading platforms will be cross-community, which means traders will no longer be confined to one community of traders, but rather be part of a much larger community comprised of traders from multiple brokerages.

– Regulated social trading platforms will guide traders towards achieving higher diversity by delineating the amount of investment allocated per master as well as distributing the total investment vs investment using social trading in a balanced way.

– As part of a risk management strategy traders will be matched with masters that best match their risk levels, by way of an advanced masters’ matrix.

– Today’s traders place a lot of importance on transparency. A set of warnings when a trader is reaching certain risk thresholds shall be used to notify the trader of possible risks.

 

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