Will Social Trading Face Greater Regulatory Scrutiny?

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Social Trading has been a huge growth area in recent years and anyone who actively follows developments in the industry will have noticed an increasing number of social trading platforms opening up shop. While many of the big players are regulated in one or more jurisdictions, some of the industry’s smaller players aren’t regulated at all. A number of newer social trading networks have already positioned themselves in advance of new EU and UK regulatory law which could have a serious impact on the social trading. Recently social trading network Tradeslide who are currently in private beta gained FCA regulation highlighting how important regulation is likely to become.

Why might social trading face greater scruntiny?

Last year the European Securities and Markets Authority (ESMA) released a circular called MiFID Questions and Answers, this circular contained significant discussion regarding whether social trading and mirror services should be categorised as regulated investment services. The circular concluded that if the instruments being traded were regulated under MiFID then social trading and mirror services would require regulatory authorization as such services would count as a form of portfolio management. However, ESMA’s opinions aren’t law but rather they provide a framework for domestic European regulators when creating and implementing financial services regulation. The opinions of ESMA could lead to a number of European regulators to deem that social trading and mirror services would fall under their regulatory umbrella.

This could have a huge effect on a number of firms that provide social trading and mirror trading services. If ESMA’s opinions come enshrined in law many of the smaller and less established social trading networks wouldn’t be able to operate within certain lucrative European jurisdictions. Whether these firms could make the jump and become regulated money managers remains to be seen. While such regulation wouldn’t bar firms from operating in certain non-EU jurisdictions it could seriously damage many firms business model with Europe being a large and lucrative market.

It could turn out that unregulated firms will not be required to gain regulation. A similar EU ruling that non-exchange traded Binary Options feel under the MiFID has largely fallen on death ears with only CySEC of Cyprus and Malta’s MSFA making the move to regulate non-exchange traded Binaries.

Uncertainty & the situation outside the EU

The uncertainty regarding the regulatory status of mirror and social trading services in the EU doesn’t appear to have put off entrepreneurs who want to get in on the growth that the sector is currently enjoying. In the US social trading networks need to be regulated by the CTFC and NFA as Introducing broker in order to be able to do business with US residents, meaning only ZuluTrade, Currensee and eToro have made inroads into the market. If Europe was to make the move to regulate social trading we may see a contraction in the number of social networks. But until the regulatory situation is cleared up, I expect to see a number of new players enter the social trading arena.

Guest post by Edmund Martin of thefxview.com

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