ESMA Eyes Copy Trading, Stronger Investor Protection

Thursday, 30/03/2023 | 10:55 GMT by Damian Chmiel
  • Copy and social trading services became popular more than 15 years ago.
  • They are now offered by one in three FX/CFD brokers.
social trading

The European Securities and Markets Authority (ESMA), the European Union's (EU) financial markets regulator, has released a supervisory briefing on copy trading firms. The briefing aims to enhance investor protection and promote supervisory convergence across the EU in accordance with ESMA's objectives.

ESMA's Take on Copy Trading Services and MiFID II Requirements

Copy trading services allow investors to automatically replicate the trading strategies of more experienced traders. With the rising popularity of these services, ESMA seeks to ensure that firms comply with the Markets in Financial Instruments Directive II (MiFID II ) requirements.

The supervisory briefing provides guidance on the qualification of copy trading as an investment service, and it outlines supervisory expectations in various areas, including information requirement, product governance, suitability and appropriateness assessment, remuneration and inducement and qualifications of traders whose trades are being copied.

According to the 25-page supervisory briefing published on Thursday, regulated firms should provide transparent and accurate information on marketing communications and costs and charges associated with copy trading services. Offered products must cater to clients' best interests, while companies should ensure that the traders whose trades are copied have the necessary qualifications and expertise.

"The supervisory briefing sets out the supervisory expectations of both ESMA and National Competent Authorities (NCAs) and also includes indicative questions that supervisors could ask themselves, or firms, when assessing firms' approaches to the application of the relevant MiFID II rules," ESMA commented in the press release.

ESMA and NCAs will persist in tracking progress in the copy trading industry and may consequently implement additional measures in the future to guarantee that copying services align with the relevant MiFID II regulations and that investment services persistently cater to the best interests of the clients.

The supervisory brief prepared by ESMA considers the Q&A published back in June 2012 relating to the legal qualification of the automatic execution of trade signals.

Is Copy Trading Still Popular in 2023?

Launched in 2010, the copy and social trading market is still extremely popular thirteen years later. According to a report by The Insight Partners, it is expected to grow at a compounded annual rate of 7.8 percent, reaching a market size of $3.77 billion by 2028. The industry's market size was at $2.2 billion at the end of 2021.

Finance Magnates Intelligence studied the prevalence of social trading services among FX/CFD brokers. To do this, we examined all the brokers listed in the Finance Magnates Volume Rank featured in each edition of our Quarterly Intelligence Report. We then investigated whether these ranked brokers offer any type of social trading feature. Our results revealed that 37.7% of the brokers within the volume rank provide some form of social trading options for their clients.

However, social and copy trading account for only 1-3% of the total trading volume for most platforms (excluding eToro and NAGA, which specialize in this type of offering). To get the bigger picture on the future of 'social trading', get our Latest Quarterly Intelligence Report HERE.

ESMA 's action may have followed an announcement earlier this year when the regulator said it would check the quality of promotional materials in the financial industry, focusing mainly on risky products. These include FX/CFD brokers' offerings and social and copy trading services.

Saxo's Presents New Portal and JPX Gets into DeFi, read today’s news nuggets.

The European Securities and Markets Authority (ESMA), the European Union's (EU) financial markets regulator, has released a supervisory briefing on copy trading firms. The briefing aims to enhance investor protection and promote supervisory convergence across the EU in accordance with ESMA's objectives.

ESMA's Take on Copy Trading Services and MiFID II Requirements

Copy trading services allow investors to automatically replicate the trading strategies of more experienced traders. With the rising popularity of these services, ESMA seeks to ensure that firms comply with the Markets in Financial Instruments Directive II (MiFID II ) requirements.

The supervisory briefing provides guidance on the qualification of copy trading as an investment service, and it outlines supervisory expectations in various areas, including information requirement, product governance, suitability and appropriateness assessment, remuneration and inducement and qualifications of traders whose trades are being copied.

According to the 25-page supervisory briefing published on Thursday, regulated firms should provide transparent and accurate information on marketing communications and costs and charges associated with copy trading services. Offered products must cater to clients' best interests, while companies should ensure that the traders whose trades are copied have the necessary qualifications and expertise.

"The supervisory briefing sets out the supervisory expectations of both ESMA and National Competent Authorities (NCAs) and also includes indicative questions that supervisors could ask themselves, or firms, when assessing firms' approaches to the application of the relevant MiFID II rules," ESMA commented in the press release.

ESMA and NCAs will persist in tracking progress in the copy trading industry and may consequently implement additional measures in the future to guarantee that copying services align with the relevant MiFID II regulations and that investment services persistently cater to the best interests of the clients.

The supervisory brief prepared by ESMA considers the Q&A published back in June 2012 relating to the legal qualification of the automatic execution of trade signals.

Is Copy Trading Still Popular in 2023?

Launched in 2010, the copy and social trading market is still extremely popular thirteen years later. According to a report by The Insight Partners, it is expected to grow at a compounded annual rate of 7.8 percent, reaching a market size of $3.77 billion by 2028. The industry's market size was at $2.2 billion at the end of 2021.

Finance Magnates Intelligence studied the prevalence of social trading services among FX/CFD brokers. To do this, we examined all the brokers listed in the Finance Magnates Volume Rank featured in each edition of our Quarterly Intelligence Report. We then investigated whether these ranked brokers offer any type of social trading feature. Our results revealed that 37.7% of the brokers within the volume rank provide some form of social trading options for their clients.

However, social and copy trading account for only 1-3% of the total trading volume for most platforms (excluding eToro and NAGA, which specialize in this type of offering). To get the bigger picture on the future of 'social trading', get our Latest Quarterly Intelligence Report HERE.

ESMA 's action may have followed an announcement earlier this year when the regulator said it would check the quality of promotional materials in the financial industry, focusing mainly on risky products. These include FX/CFD brokers' offerings and social and copy trading services.

Saxo's Presents New Portal and JPX Gets into DeFi, read today’s news nuggets.

About the Author: Damian Chmiel
Damian Chmiel
  • 1588 Articles
  • 36 Followers
About the Author: Damian Chmiel
Damian's adventure with financial markets began at the Cracow University of Economics, where he obtained his MA in finance and accounting. Starting from the retail trader perspective, he collaborated with brokerage houses and financial portals in Poland as an independent editor and content manager. His adventure with Finance Magnates began in 2016, where he is working as a business intelligence analyst.
  • 1588 Articles
  • 36 Followers

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