ESMA Eyes Copy Trading, Stronger Investor Protection

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 MiFID II MiFID II stands for the Markets in Financial Instruments Directive, and is the second iteration of a sweeping directive. As such it is known as MiFID II. The original Markets in Financial Instruments Directive (MiFID) became effective in November 2007. It was intended as the foundation of the EU’s Financial Services Action Plan, a comprehensive project to create a single European market in financial services. MiFID is intended to create a level playing field for firms to compete in the EU’s fina MiFID II stands for the Markets in Financial Instruments Directive, and is the second iteration of a sweeping directive. As such it is known as MiFID II. The original Markets in Financial Instruments Directive (MiFID) became effective in November 2007. It was intended as the foundation of the EU’s Financial Services Action Plan, a comprehensive project to create a single European market in financial services. MiFID is intended to create a level playing field for firms to compete in the EU’s fina Read this Term) 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.

ESMA issues supervisory briefing on firms offering copy #trading services, in accordance w/ its objective of fostering investor protection and promoting supervisory convergence → https://t.co/B55r18MpqE. #ESMAcartoons @EU_Finance

But what does investor protection mean to us? 👇

— ESMA - EU Securities Markets Regulator 🇪🇺 (@ESMAComms) March 30, 2023

"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 ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term'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.

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