Social Trading Regulation and MiFID II

filippo ucchino Filippo Ucchino calendar Last Updated: May 2022 timer 5 min read

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Regulation of trading, in general, has evolved in recent years. This is particularly true in Europe where the regulatory environment is viewed as stringent but also one of the most respected in the world.

Here, the InvestinGoal team has analyzed the impact regulation change has had on social trading and in particular the development of MiFID in Europe. We have also examined the changes and developments in social and copy trading after MiFID II with the aim of providing as much insight as possible.

Table of contents

What is MiFID and why does it exist?

MiFID, Markets in Financial Instruments Directive, is a European Union directive, which came into effect in 2004. This directive contains a long list of requirements and standards to which all participants in the European financial markets must adhere.

mifid social trading regulation

The main objective of MiFID is to create a European financial market in which encouraging honest competition between the participating companies, and at the same time increasing consumer protection.

The first implementation in 2004, referred to as MiFID I, was a significant positive change for the industry.

The new legislation, which came into full force in 2007, replaced the old ISD (Investment Services Directive).

The global financial crisis which began in 2007, however, highlighted all the weaknesses of MiFID I.

In several areas there was a lack of transparency and controls, in other areas, instead, there was still no sufficient protection for investors. In addition, technological developments at that time raised new issues in a constantly evolving landscape.

It was at that time that HFT (High-Frequency Trading), and more generally algorithmic trading, gained prevalence and some notoriety with accusations of causing the infamous flash crash of 2010.

European Union legislators then began to explore ways of updating, integrating, and improving MiFID I.

The “discovery” of copy and mirror trading

The consultation period for updating MiFID I allowed the opportunity for the European authorities to focus on social trading which was growing in popularity at the time. At this time, copy trading and mirror trading, in particular, were attracting traders.

  • Copy trading is the practice of replicating trading signals generated by a trader, through a platform that acts as the interface between the supplier of the signal (the trader) and the investor who copies it.
  • Mirror trading instead is the practice of replicating trading signals generated by an automatic strategy hosted on the interface platform.

The authorities paid special attention to the fact that this process was fully automated, i.e., once the choice of the traders or strategies from which to copy was confirmed, the investor could very well stop following the trading activity, because everything was done automatically.

The new social trading regulation

From the perspective of European authorities, the evolution of this form of trading raised legislative concerns.

Despite the trading account remaining owned by the investor, the capital was being moved and managed by an external entity, and this was enough for the authorities to classify both copy trading and mirror trading as asset management disciplines.

There was only one distinction made. If the trading signal generated by the trader or strategy was then replicated automatically and without any confirmation from the investor, then that was classified as asset management.

Alternatively, if the investor had to confirm the buying or selling signal, and operate manually, this was no longer considered asset management, but simply advice.

This led to all the companies that were offering copy trading or mirror trading services having to adapt to the same MiFID regulations planned for asset management companies.

This change impacted many brokers including ZuluTrade which, prior to the regulatory update, was considered an IB (Introducing Broker) and a service provider. Essentially, the company was the medium through which customers were finalizing the opening of trading accounts from various forex brokers. It also provided an automatic signals replication service.

Now, with the update to MiFID II, ZuluTrade is still an IB, and service provider, but it’s also classified as a type of asset manager, and had to update its services as such.

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(74-89% of retail CFD accounts lose money)


About the Author

Filippo Ucchino

Co-Founder - CEO - Broker Expert
Filippo is the co-founder and CEO of InvestinGoal.com. He has 15 years of experience in the financial sector and forex in particular. He started his career as a forex trader in 2005 and then became interested in the whole fintech and crypto sector.
Over this time, he has developed an almost scientific approach to the analysis of brokers, their services, and offerings. In addition, he is an expert in Compliance and Security Policies for consumers protection in this sector.
With InvestinGoal, Filippo’s goal is to bring as much clarity as possible to help users navigate the world of online trading, forex, and cryptocurrencies.

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