The wave of regulation that seems to be on its way into the copy trading sphere has many implications for everyone involved, from the brokers and technology providers to the trade leaders and investors that use, and profit from, these services. In previous episodes, we have shone a spotlight on the challenges faced by those on the industry side, and today, we are going to do the same for the end users.
One of the biggest threats to the prevailing copy trading model that is posed by regulation could be that signal providers and trade leaders may need to obtain money manager’s licenses. Although it is still far from clear which side of the fence the various regional and national regulators will fall on this issue, it could prove semi-fatal for the whole business model if this is what they decide to do.
On one hand, you can see the logic in this, in that trade leaders are effectively acting as money managers for the people that choose to copy their trades automatically, and financial advisors for those that simply view their trades with the option to manually copy them. The key word here – and the main sticking point – is ‘effectively’, because the set-up is far removed from that of a traditional fund manager or financial advisor.
Unlike a money manager, a trade leader doesn’t hold any money on behalf of those who copy their trades – so technically, the client is still ‘managing’ their money, it’s just that they have chosen to do so by automatically copying the trades of someone else. Also, unlike a financial advisor, a signal provider is merely letting others know what they are doing, and the onus is on the investor to decide whether to place any faith in their assessments or not.
However, things get a little more complicated when trade leaders and signal providers start charging people to view and/or copy their trades. Most social trading networks operate a two-tier system, where there are traders who allow people to view or copy their trades without charge, and more experienced and/or successful traders who charge subscriptions or other fees to view and/or copy their trades. It is this latter group that have more to fear from regulators.
So what can a trader do to prepare for these changes? Well, at the moment, there is no particularly pressing need to do anything, as the regulations are still under discussion and won’t be in place for some time yet. However, if you are a trade leader that makes money from providing signals, then it may well be wise to pre-empt any changes to the regulation by gaining the necessary accreditation. In the fifth and final episode of this series, we shall be providing you with the necessary resources and links to help you to achieve this goal.