How ZuluTrade EU has changed after MiFID II
In the previous post we saw how, in Europe, the sectors of Copy Trading and Mirror Trading have changed at the regulatory level following the implementation of MiFID II.
If we talk specifically of Copy Trading, i.e. of the practice of copying automatically the trading signals produced by other traders, then there’s no doubt that the first company in this sector is ZuluTrade (we’ve even dedicated a free course to it).
Having large part of its customers precisely in Europe, ZuluTrade has been forced to update the terms of its service, and, in part, to change some of its instruments, to comply with the new regulations.
All this took place December 12, 2014, when ZuluTrade, with an email to all its customers in Europe, announced its small “transformation”.
Again, all this is only for the European customers. All users of the other countries outside the EU have found no changes in the offer and options of this platform.
Please note: ZuluTrade is practically offering the same service as before, and little has changed in general.
However, European users, particularly those who were using this company before December 12 will surely have found some differences.
In this article, indeed, we will list and explain all these changes, showing the “Before and After MiFID II” of each of them, in order to be clear about the new functioning of Copy Trading with ZuluTrade EU.
ZuluTrade “Before and After” MiFID II
– Selection of the Broker
To start copy-trading, it was enough to open a live account at ZuluTrade with one of the many supported forex brokers (about 40), and confirm it by sending all the documentation required by the broker. If a customer was already in possession of a trading account, and the broker was supported by ZuluTrade, he could claim a connection without the need to open a new one.
In case the user must open a new account, ZuluTrade can offer only the AAAFX broker, currently the only one that, for the copy trading service, meets all the MiFID II standards. The reason is simple: AAAFX is a brokerage company owned by ZuluTrade itself, so the regulatory update has been immediate.
ZuluTrade currently cannot personally propose other brokers as it was in the past, but a user who already have an account can ask his broker if it can be connected to ZuluTrade, or he can make this request before whether he intends in any case to open an account with a broker different from AAAFX.
Then, it depends on the broker to respond to the request, and, should it comply with the regulations, ZuluTrade can accept the connection.
So, to summarize, ZuluTrade cannot propose but can accept other brokers, if fully in accordance with MiFID II.
If you need to open a new account, with the broker AAAFX you play safe (and in any case, it’s the best for the signals replication). If you want to open it with another one (or you already have one) you have to ask to the broker assistance department if it can work connected with ZuluTrade.
– MiFID questionnaire at the account opening
Before Copy Trading was equated to asset management, the two operations that a user had to make were the creation of the Live profile at ZuluTrade, and the relative opening of a trading account with a broker, or the linking to an existing one.
Now, in addition, we also have the MiFID questionnaire to fill out.
The MiFID questionnaire (here you have a preview) is a set of questions designed to outline a profile of the investor about his financial situation and his knowledge of the markets.
In simple words, before you start investing, on the theoretical side ZuluTrade wants to know what you do, your education level, your level of knowledge of the markets, of some financial products, and if you already had experience with them and how much.
On the practical side, instead, it wants to understand how much you are deciding to invest (and therefore to risk) in relation to your balance sheet, your income and your obbligations.
“Why all these questions ?! What is the purpose of this questionnaire!?”
The aim is simple: the company with which you are about to invest wants to be sure you know what you’re going to bear in terms of risk, and that you don’t risk more than you can afford.
WATCH OUT! The MiFID questionnaire can also be failed, fully or partially.
If it’s fully failed, the investor’s account won’t even get activated and he won’t be able to invest in copy trading with ZuluTrade. If it’s failed only partially, ZuluTrade will bring limits on how much of his money the customer will be allowed to risk.
The logic behind this is simple. If, by the profiling questionnaire, ZuluTrade should deduce that the products were not in line, in whole or in part, to the risk appetite of the customer, being it also his consultant (according to the current MiFID update) ZuluTrade would be obliged to block the investment attempt as inadequate, or to limit it in order to make it adequate to the risk profile of the customer.
Let’s make some examples.
- Let’s suppose you have answered that you earn annually from 0 to € 50,000. Then, you also said that every month you spend more than 75% of your income to meet all your obligations. At that point, with a simple calculation, ZuluTrade will know that annually, at most, you have a surplus of approximately € 12,000. Let’s suppose you have then opened an account for € 20,000. ZuluTrade will hardly allow you to risk the entire capital, because it would mean you will risk more than you can afford, since part of those € 20,000 should be used for your monthly expenses.
- If you answered that the capital you have deposited, and that you want to risk, represents more than 50% of all your assets, without the need to calculate, it would outline a too risky situation to allow an investor to continue.
- If you answered your investment objective is to “Protect your capital”, then you will hardly pass the questionnaire, because with this type of investment, in a derivatives market, to achieve earnings on the capital you need necessarily to put it at risk, and putting a capital at risk is the contrary of protecting it.
- If you answered you have “zero knowledge and zero experience” in all the listed financial products, you may also continue, but ZuluTrade will hardly let you risk all your invested capital. Most likely, it will let you only use one part of it, a half or a quarter.
WATCH OUT 2! Don’t lie!
What we are saying is not to be read as an invitation to give answers that are not true in an attempt to have full freedom on the investment. On the contrary.
This is supposed to be an explanation of the reasons (more than right and fair) that can lead to failure in the questionnaire.
If you find yourself in the position of having to lie for fear of not passing it, then it really means that the practice of investing in the derivatives market (because that’s what it is), and in our case in copy trading with ZuluTrade, is not a right choice for you at this time.
If you have to lie, it means from the outset that you are risking too much, and that’s not good. The first two cases, of the four considered before, are clear examples of what it means to put at serious risk your financial and patrimonial situation.
So, let me repeat: don’t lie. Fill out the questionnaire with true and accurate answers, and stick to any restrictions that will be imposed. It’s in your interest. As we will see, there will still be opportunities to repeat the questionnaire and update your profile should it change (hopefully improving).
– “Traders” Performance Page
The ZuluTrade “Traders” page contained a list of all the thousands of registered Signal Providers, all of them, without exception, sorted by ranking.
Almost all the Signal Providers were accepted and made available for replication, except those who had shown clear signs of misconduct. ZuluTrade policy had always been to show the Signal Provider from day 1 and record all data in the making.
If someone was incompetent, he obviously remained on the margins of the ranking. If he was too risky, based on various control parameters, he was reported as such.
To the “after MiFID II” European customers, ZuluTrade shows only the Signal Providers falling within the Top1000 Zulurank ranking. So, you can connect to your account only those traders who, at the time of the choice, can be found in the Top1000.
Furthermore, in order to be allowed to the European Top1000, the performance of the Signal Providers must satisfy three conditions:
- The Max Drawdown shall not be greater than 30% of total profits: you should have clear, however, how ZuluTrade Max Drawdown is calculated, to avoid confusion.
- Minimum time of 12 weeks: a Signal Providers will be made available only after 3 months of trading activity connected to ZuluTrade.
- The average profit per trade must be greater than 3 pips: this should automatically exclude those traders who use too risky strategies, based on facing high risks against very few pips of profit (as we know, the golden rule of trading is “cut losses and let profits run“).
(For full details on what a trader can or cannot do, you can consult the ZuluTrade Trader Guide.)
If a Signal Providers respects these three parameters, then he can also be followed by European customers, but, watch out, it doesn’t mean he will automatically end up in the Top1000. For that, he must necessarily win the fierce competition of all the other 499 traders.
Furthermore, it’s clear that, as a Signal Providers has entered the TOP1000, he can also get out.
“What happens in that case?”
Let’s see in the next section.
– Connecting and Disconnecting a Signal Provider
All the Signal Providers were visible and could be connected into the account from their first day of life. The management of the trader was entirely in the investor hands. He had to monitor them and, if he wanted, to disconnect them.
He could do it in different ways, and he had also the ZuluGuard function available, to disconnect them at the occurrence of specific situations.
In any case, every decision was made solely by the investor.
The “pre MiFID II” options have remained, but now there is a new one, out of the investor’s control (or nearly so).
Basically, you can connect and begin to follow a Signal Provider only if he is present in the Top1000, but should he, at some point, for whatever reason, get out of this ranking, then ZuluTrade will intervene automatically disconnecting the Signal Provider in question from your account.
The trader would remain in your portfolio, but his orders would no longer be replicated. The only orders that you would receive would be those related to trades still open at the time of disconnection. In practice, the Signal Provider would still be able to close what he had opened before being disconnected, but nothing more.
Then, if, in the future, the trader should be able to come back again in the Top1000, then he would again be activated, and you will start again to replicate normally all his signals.
While we can understand the good intentions of ZuluTrade in implementing this solution (which however was imposed by the MiFID II update), on the other hand we have some doubts on the actual effectiveness of this system.
Our major doubt is: Suppose a Signal Provider loses rankings until leaving the Top1000 due to a series of very normal drawdowns. While being in the Top1000 you would replicate all of those orders finished at a loss, and you would then stop to follow him once he came out.
The Signal Provider will continue to operate as usual and, once finished the drawdown period, he will begin to recover the losses with a series of good operations, until being able to regain a place in the Top1000. The paradox lies in the fact that you won’t be able to replicate that good positive series that will recover the drawdown, since the Signal Provider was disabled because out of the Top1000.
However, we must admit that this system could be a good shield against those Signal Providers who suddenly lose remarkable places in the ranking because of too risky strategies or for total loss of control. In that case, this system could really stop the losses (and a potential disaster) if, by any chance, you should not be aware of what is going on.
The biggest problem would be when there is nothing wrong with the Signal Provider’s behavior, but only very normal cyclical phases of performance, thus also of drawdown, but that can take him out of the Top1000, also partly because of aggressive competition.
“What can I do about it if I want to still follow that Signal Provider to fully benefit of the trades that will take him to recover the accumulated drawdown?”
We have the solution, and is very simple, it only requires a minimum of monitoring.
When the Signal Provider comes out of the Top 1000, ZuluTrade is forced to disconnect him, and leave only way to manage the trades still open. Visiting your profile at that time, in the settings tab, you would find him “red” marked (the color indicating that he’s “off”), together with a notice of ZuluTrade explaining why he’s has been disconnected (exit from Top1000).
What you have to do, simply, is activating him again, manually, in order to deliberately decide to continue to follow the signals of that trader despite the warning of ZuluTrade. Once reactivated, you will continue to replicate that Signal Provider normally, as always done.
This option is unfortunately not automatable, and this is why I say it requires a minimum of monitoring. Once a day you will need to check if some Signal Providers have been disconnected.
Should you find some disconnections, then you should assess the situation to ensure that the trader has not really lost his mind or changed strategy, putting at risk your account, and if, and only if, you should assess that none of this has happened, but that it’s normal operation in a physiological stage of drawdown, then you could reactivate him and continue to follow him.
– Settings Page and ZuluGuard
Despite several warnings from ZuluTrade and recommendations for caution, a customer could be able to risk all his capital, without being obliged to set a single instrument of risk control.
The ZuluGuard function called Capital Protection is now mandatory, and it should reflect the investor’s risk profile outlined by ZuluTrade following the completion of the MiFID questionnaire.
In addition, according to the settings, to the remaining capital and to the previous trader performance, ZuluTrade may impose restrictions on the lot size you can use to replicate a Signal Provider.
“How does this work?”
The ZuluGuard Capital Protection is a capital security feature, which consist on deciding what is the maximum level of loss of capital you are willing to tolerate for each Signal Provider.
For example, you may decide to allow a Signal Provider to lose a maximum $ 500 of your capital, and, if reached, all the trades of the trader would be closed, and he would be disconnected.
To how many pips those $ 500 correspond depends on your choice of the Lot Size. For example, if you choose a lot size of 1 standad lot, $ 500 would be about 50 pips of tolerance; but if you choose a mini lot, then it would be about 500 pips.
Now we can move back to the MiFID questionnaire.
Once compiled, ZuluTrade will calculate the investor profile, and will decide whether and how much percentage of his capital the investor will be allowed to risk, up to a maximum of 75%.
Therefore, ZuluTrade will force the investor to set the ZuluGuard Capital Protection for each Signal Provider, in order to never exceed the maximum total loss allowed by the MiFID profile.
Let’s make an example.
You have an account of $ 10,000 and, after filling out the questionnaire, you appear to be a profile that has the ability to risk up to 50%, i.e. $ 5,000. You decide to follow 5 Signal Providers, and ZuluTrade then forces you to set ZuluGuard for each of them. Having five traders, and $ 5,000 of capital to let them manage, you decide to assign $ 1,000 each of Capital Protection.
This of course is just an example, you may very well give more or less margin to a specific trader than another. The important thing is that this total margin never exceeds 50% of your capital, that is, never more than $ 5,000.
Don’t worry, ZuluTrade will automatically calculate your exposure and prevent you from risking more than you should.
The other restriction introduced, in fact, is precisely to limit the possibility of error or excessive risks.
ZuluTrade now also applies limitations on the choice of the lot size with which you can replicate a Signal Provider, in particular based on the statistics of the latter and on your capital.
With the obligation of the ZuluGuard Capital Protection Zulutrade rightly puts a limit to how much capital you can risk. With this lot size limitation, instead, it seeks to prevent the risk capital to be put “too much at risk”.
If, after the ZuluGuard Capital Protection decision, a trader would have $ 100 in management, and you accidentally would set a Lot Size of 1 standard lot, a single simple drawdown of 10 pips would be enough to reach the limit and burn the capital allocated for that trader.
Here is where ZuluTrade intervenes, by setting limits to your choice based on calculations that take into account the statistics of the trader, and your available capital.
– Customizing the replication process
The investor had full freedom to customize the operation of the Signal Provider, such as to differentiate the replication Lot Size of each currency pair on which the Signal Provider operated. For example, you could choose to replicate with a standard lot all the trades on EUR/USD, and with 2 lots all the trades on GBP/USD.
Moreover, with the Auto Mode the novice investor could only choose, from a scale of 1 to 100, how much of his assets he wanted to risk, and leave to ZuluTrade the task of calculating the lot size to be assigned to the Signal Providers.
The customization for currency pair is no longer available. The lot size is fixed and equal for all the currency pair used.
All the other customizations for currency pair are still available. We talk about:
- the possibility to replicate the orders only if they are of a specific type, such as only if Long or only if Short, or only if it’s a Long pending or only a Short pending, or only if it’s a market order, and so on;
- The limit on the maximum number of trades that the Signal Provider may open on the currency pair;
- The limit for that currency pair but in terms of Lot Size;
- The Limit order to which closing all the trades, with the annexed Safe function;
- The Stop order, with its Safe and annexed new functions of Trailing Stop and Conditional and Fixed Stop;
- The Offset Pips;
- The new pips Spacing.
Moreover, the “Reverse” option also has been cancelled, that option that allowed to replicate the signals of a trader, but on the contrary (the Long became Short, the stops became take profits and vice versa). Being honest, we won’t miss it.
We had to say goodbye to the Auto Mode option too, only the Custom remains. While the Auto Mode could be a good way to avoid that totally inexperienced beginners would get in trouble, on the other hand, however, it had great limits, one for all to use the ZuluTrade Drawdown as a parameters for the calculations, a value of hard interpretation and sometimes misleading, with respect to the classical one.
Now, the choice of the lot size is inevitably in your hands. Better to know what you’re doing, and on InvestinGoal you can find all the answers.
– Deposits / Withdrawals
Are you worried because your situation has changed, or are you sure it will change in the short term, and you want to update your MiFID profile?
Don’t worry about that. The last piece of this update states that the entire questionnaire, and all the annexes calculations, must be repeated every time you will carry out a withdrawal or a new deposit.
Obviously, between the two, I sincerely hope it will happen as a result of a withdrawal of the profits earned.
When, from a situation of extreme freedom, you start to have some restrictions of any kind, it’s normal to have the instinct to criticize or reject the new rules.
In this case, however, we can say with conviction that the new restrictions for the European client are totally aimed at his protection, so overall positive, even if unpopular.
The ZuluGuard Capital Protection was a solution that was worth to be used even before, when not obliged, and the same applies to the maximum Lot Size limitation.
If someone should complain about not being able to take absurd risks aiming to achieve crazy performance … then he should probably wonder whether the real purpose of trading and investing is really that.
In addition, these new restrictions can avoid mistakes made in good faith, especially those related to incorrect setting of the lot size (more than once we knew of unprepared users that, instead of micro lots, had mistakenly set standard lots).
The only sore point, in our opinion, is the condition of the Top1000, and the auto disconnection of traders when they come out of the ranking, as explained before.
There is also to say that having limited the visible traders has decreased the chance of finding some good Signal Provider who are still “far away” from the Top1000, in order to exploit all his ascent even before reaching the top of the rank. You can of course still do that, but in a more limited way.
So, overall, we welcome the new ZuluTrade conditions for the European customer. However, should the MiFID II European legislation allows some maneuvering space, there’s still room for improvement in the future.
And with that, we have concluded.
What do you think? Were we quite exhaustive? Let us know what you think in the comments below!
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Thanks and… see you soon.