Regulations of investment platforms and democratization of trading
How can brokers and regulators prepare for changes caused by democratization of trading?
In the previous article, we discussed the future of money management systems and emerging industry trends such as simplification and gamification, which entice new clients to start trading by operating money management platforms with user-friendly web interfaces. Complementing with the growing diversity of financial offers, this trend leads to market acceleration, and these processes cannot avoid counteraction.
The subsequent reaction to the above-described trends is the proposal to create new legislation that will conduct all unbalanced processes in the constantly changing environment and protect newly joined traders. To reduce the arisen risks, regulatory authorities carefully monitor brokerages activities (even in social media). Such actions mostly involve securities with high volatility like ASIC restriction of trading rules for CFD symbols or FCA’s extension of the temporary regime for cryptocurrency trading.
Specifically for money management systems, this tendency appears as tightening the regulatory requirements for the approval of signal providers or brokers’ KYC policy. The growing interest in platforms such as PAMM or Social Trading among clients leads to increased responsibility of money managers for trading higher amounts of trusted funds. To make the investing environment more predictable, regulators ask brokers to check clients more carefully before allowing them to make financial decisions on behalf of investors.
To stabilize the trading activity of new traders with less experience, regulators have also introduced special categories of investors. Such frameworks already existed, for example, CySec client categorisation, or are widespread within the portfolio management industry. To run a PAMM account as a money manager, some brokers ask their clients to meet several requirements. For instance, traders need to prove their understanding of financial markets and deposit a substantial amount of their funds into a managed account to minimize potential recklessness. These steps are just a few preventive measures used by brokers to avoid additional pressure from the authorities while onboarding new clients.
Despite the aim to protect investors from unexpected losses, brokers cannot always take regulators’ position as advantageous. For instance, strengthening requirements to become a money manager can conflict with the attraction and retention of successful money managers or signal providers. In such situations, there are two general options for brokers. The first one is to adapt to the new obstacles with the trading platform configuration or to use money management solutions with in-built risk management functionality. The second option is to avoid the regulatory restrictions by moving to offshore zones, which have their own set of challenges.
The trends presented in the two materials are deeply independent processes that have their causes and possible consequences. But, even though all of them affect the development of money management systems, they are not the key dilemma for the system’s future.
Behind all these processes, there is one point that is common for the majority of brokers: the lack of differentiation of the investment offer. PAMM and Social Trading systems provided by different brokers are very similar to each other: it is either presented as an alternative way to invest or as a solution for traders with limited experience.
However, this strategy does not help brokers promote investment platforms and stand out from their competitors. To solve this issue, brokers cannot just prepare themselves to face the consequences such as market complications and legislation. Instead, by focusing on one of the trends, brokers may highlight money management systems in their service offer and achieve differentiation. Brokers should choose whether they want to build a business around gamification or simplification elements to attract a new generation of investors or create a sophisticated environment with advanced functionality for conservative traders.
In conclusion, both market acceleration and regulations are making their mark right now, affecting certain fields of the trading industry. In the near future, we can expect the market to significantly alter, so the main question we should be answering now is: “How can we adapt to these changes?”
Brokeree Solutions is a leading technology company specializing in turnkey solutions development, trading platform servicing, and consultation for retail brokers running MetaTrader 4 and 5. With a strong customer-centric approach, the company is renowned for its flagship, multi-server Social Trading, and PAMM investment platforms.