Licensing of social trading
What license is needed for the Copy Trading platform?
Such type of services as copy trading is becoming a very popular addition on various financial platforms. Companies that provide their clients with the opportunity to copy trades of experienced traders gain a significant competitive advantage over simple brokers by attracting more clients. What license is needed to carry out copy trading? The answer to this question is not always unambiguous!In this article, we will look at several main types of financial licenses that allow you to engage in copy trading, and also tell you what opportunities they open up for their holders.
What do Copy Trading and Portfolio Management have in common?
To begin a review of licenses that allow you to engage in copy trading, you should start with the recommendations of the European Securities and Markets Authority (ESMA). According to the ESMA clarifications, the provision of copy trading services falls under the same regulation as investment management (Portfolio Management) if:
- The copy trading service provider provides its clients with the opportunity to choose one or more third parties that provide trading signals;
- After selecting such a signal provider, the client authorizes the copy-trading service provider to issue orders on its behalf and convert each signal into a corresponding buy or sell order (regardless of whether such a signal will be executed by the copy-trading service provider itself or transferred to a third party for execution), without further interference from the the client.
This position follows from the definition of investment management (Portfolio Management) according to MiFID – classic copy trading requires the client to transfer the mandate to manage his portfolio (funds) to a third party, and further decisions are made by the copy trading service provider without any intervention or confirmation from the client. A similar position is taken by the UK regulator, the FCA.
Thus, the classic activity of platforms that provide copy trading services to their clients requires obtaining an asset management license.
Is there a simpler and cheaper type of license for copy trading than an asset management license?
Obtaining an investment management license opens up the widest opportunities to its owner, while it requires certain costs for obtaining and maintaining. For example, the minimum authorized capital for an investment manager starts, as a rule, with 125,000 euros.
If you want to save on licensing, but at the same time provide your clients with copy trading services, then there is a solution for you - this is an Investment Advisor license. An important condition that must be fulfilled in this case is to receive confirmation from the client after receiving the corresponding trading signal before it is executed in the form of an order from the client.
Such a model of work falls under the licensing of an Investment Adviser, the requirements for which are significantly lower than for an investment manager. For example, to obtain this license in Cyprus, an authorized capital of only 50,000 euros is required, which is significantly less than necessary for an investment management license (saving more than twice!).
Thus, the copy trader's work model, in which there is no automatic execution of the client's orders, and the client himself confirms the execution of each order, will significantly save on licenses.
Do I even need a license to provide copy trading services?
Of course, there is a question that you should definitely find an answer to when discussing the issue of licensing — do you need a license for copy trading at all? As we already know, in most cases the answer is "Yes". But there are always exceptions!
If your service does not just give the client the opportunity to copy the trades of other traders, but provides advanced settings for copying trades, you may not need a separate financial license at all.
It is important to note that this is not just about limiting the amount of transactions or similar basic parameters for copying transactions, you will need something more.
The execution or non-execution of orders based on the received trading signals should be determined by the client himself, who should set detailed restrictions for each signal/order, such as the exact market conditions that will coincide with the receipt of the signal. For example, the purchase or sale of the instrument "A" will occur when its price in the market "B" reaches the level "C" and you will receive the corresponding signal from the trader whose trades you copy.
This model of work may not be suitable for everyone, but its advantage is obvious – you do not have to spend effort and money to obtain a financial license!
Summarizing the above, it can be noted that the licensing requirements for Copy trading service providers largely depend on the nature of the service provided and the method by which the service is provided. If you want to launch a copy trading service, contact Antwort Law specialists for the correct answer!