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Meeting ESMA Regulatory Framework with Technology

by TradeSocio,   April 9, 2019

The entry into force of the new ESMA regulatory framework in January 2018 rocked the financial arena, with numerous brokerage firms closing their operations and losing credibility as an increasing number of investors started withdrawing funds without reinvesting. In the long term, this triggered higher costs for brokers with the acquisition of new, refined technological tools to help them increase credibility, retain clients and attract new ones while increasing lifetime value.

 With 76.3% of traders losing money rather than making a profit out of trading activities and the aggressive go-to-market strategy adopted by some brokers to acquire new clients, brokerage firms needed to adopt different strategies, which, in most of the cases, involved higher expenses if they wanted to secure their place in the market. The spending on client acquisition has increased significantly since the implementation of the new ESMA regulatory framework. Not only that, but also looking at the data reported by brokers in the first month of implementing MiFID II (August 2018), and comparing trading success data with the same month of the previous year (August 2017), the rate of profitable retail accounts slightly dropped under the new rules.

According to ESMA, the soaring cryptocurrency market in 2017 and the general bullish trend in the markets in August 2017 contributed to a growth in retail trading profitability compared to the same month of 2018, when MiFID II came into effect. The watchdog also noted a drop in the number of automatic close-outs and a decrease in the chances of client accounts slipping into negative equity.

While the bottom line for brokerage firms continues to go through changes, Nasdaq Clearing announced that initial default procedures were to be launched due to a clearing member’s failure on 11th September 2018. According to ESMA’s 50th report, these procedures include the utilisation of the default fund, followed by a replenishment and an increase in margin levels.

When it comes to financial products and innovative financial technologies, through its regulatory framework, ESMA takes the first steps in settling down the waters of the crypto market and takes an active stance with regards to distributed ledger technology (DLT) development. Also, the European financial oversight authority acknowledges that fintech and regtech developments remain the main drivers of the financial industry. In reaction to the demand and supply mechanisms, as well as the bottlenecks created by ever-tightening regulations and budget limitations, the market moves at high speed towards automation, AI and algorithmic trading.

Tipping the scales with mirror trading technology

As machine learning gains terrain, trade automation tools are extensively used in an aim to replace human decision making and minimise errors. This trend is driven forward by the growing supply of enhanced technologies such as Tradesocio’s Mirror Trader, which allows traders of all levels of experience to enter the markets by either investing in cherry-picked trading strategies or being followed by investors.

Additionally, Mirror Trader supports decision making by allowing investors to review the performance of their selected Fund in real time and start, stop, increase or reduce the amount of their allocation at any time. Moreover, the mirror trading solution works like a directory of Funds, enabling investors to choose from a wide range of strategies, listing the top performing ones, taking into consideration factors such as the date of creation, investment product (forex, cryptocurrencies etc.), strategy type, profit and loss, risk level, ratios, maximum drawdown, volume and other advanced statistical analysis. In this way, Mirror Trader allows investors to make informed investment decisions every step of the process while enjoying the opportunity to interact with each other through the Community feed. In turn, all these features help build trust by creating a transparent environment where investors are constantly in control of their funds, having the ability to monitor their balance and equity in real time, manage risk by setting up capital protection per allocation, and also connect with other investors and brokers through push notifications (i.e.: market news, announcements and direct messages between investors).

Compatible with both web and mobile devices, Mirror Trader comes with a number of benefits for brokers as well. With this solution, brokers can control revenue flows and monitor the activity of each account from the Broker Admin Control Panel, which allows easy customisation of the different access privileges across all departments of the brokerage house. This allows all teams to access the data they need in a few clicks, thus helping streamline operations, accelerating the decision-making process at all levels and increasing efficiency.

Furthermore, allowing easy customisation and branding alongside direct connection to LPs, PSPs and signal providers through API, FIX, MT4, MT5 as well as other terminals, Tradesocio’s Mirror Trader offers a robust solution to many of the brokers’ challenges when it comes to complying with the new ESMA regulatory framework.

With technology providers like Tradesocio staying compliant with ESMA’s regulatory framework is no longer an impediment to expansion and an increasing number of brokers have started to understand that and adopted more innovative solutions like the Mirror Trader.

On this background, it is only a matter of time until automation and AI will expand to the investment management and other sectors of the financial industry. Will regulators come up with a new set of rules targeting technology providers? Quite predictable. In any case, the takeaway is this: technology is and will remain at the core of financial services and, most importantly, key players in the financial arena have started to understand this and act accordingly to stay in or even beat the trend.

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