Name
Global FinTech Guide
Country _ Name
United States
SectionTitle
Trading platforms / social trading platforms / signal following
Body
FinTechs belonging to this category operate trading platforms or online marketplaces for investment opportunities or certain financial contracts – e.g. securities, factoring etc. and sometimes furthermore provide contact to financial experts and tools for the decision-making.

FinTech-signalling and social trading platforms provide users with the opportunity to exchange opinions on financial investments and offer signal providers and traders the possibility to make their securities portfolio publicly visible. This way the portfolios can be linked to and followed by other traders via the platform automatically, so that the trading and investment strategy of the followed traders can be copied.

The platform often cooperates with a financial services provider or a credit institution where both the trader and the follower hold their securities accounts, and which execute the orders both of the trader and the follower and to which the platform passes on the trading decisions.

Introduction

Attitude of the country towards trading, social trading or signalling platforms

Online trading platforms are common and broadly accepted. A number of these platforms, particularly newer ones, allow users to “follow” the activities of more popular or famous investors. The SEC has signalled that it may try to limit this type of activity. While regulators have a positive attitude towards technology and have stated that they strive to be “technology-neutral,” recent rule proposals have heavily favoured investor protection over innovation. Furthermore, following the WallStreetBets “meme stock” fiasco, both the SEC and Congress have investigated ways to reduce social influence in trading.

Legal affairs

Obligations and requirements to provide trading, social trading or signalling platforms described above

Trading, social trading and trade signalling platforms could be subject to any number of different regulatory regimes. A platform that merely allows investors to share their thoughts on what stocks to trade, such as Reddit, or that merely routes orders to a regulated entity may not be regulated at all. A platform that has a more formal program where sanctioned participants can be followed or make recommendations to the community may be regulated as an investment adviser. Further, a platform that presents algorithmic signals indicating when it is a good time to buy or sell a security likely would be regulated as an investment adviser (though someone who merely presents economic indicators likely would be unregulated). A platform that merely allows trades likely would be registered as a broker-dealer or would need to have a registered broker-dealer run that aspect of the platform. If the platform truly allows exchanges on a peer-to-peer basis, it may be a securities exchange, although it is quite common for registered broker-dealers to instead operate an “alternative trading system” (ATS) that is exempt from securities exchange registration (while subject to significant other regulations applicable to broker-dealers). 

For a discussion of the regulatory requirements facing investment advisers, see “Asset and portfolio management—Legal affairs” above. The discussion below focuses primarily on trading platforms that are broker-dealers, alternative trading systems or securities exchanges. 

Broker-dealers generally are subject to the regulatory requirements described in “Asset and portfolio management—Legal affairs” above. 

Absent an exemption, a platform would be considered a securities exchange if it constitutes, maintains, or provides a marketplace or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a st
ock exchange as that term is generally understood, and includes the marketplace and the market facilities maintained by such exchange. Securities exchanges are subject to extreme regulation and themselves need to become self-regulatory organisations with their own sets of extensive rulemaking that need to be approved by the SEC. For this reason, there are only a couple dozen registered securities exchanges and almost all of them are operated by the same parent companies.

Most commonly, FinTech platforms avoid the requirement to register as an exchange by merely routing orders to other regulated facilities for execution, acting as a mere communications system. These types of platforms may by unregulated. 

Platforms may also exempt themselves from registration as a securities exchange by operating as an ATS. An ATS is a system that provides a marketplace or facilities for bringing together purchasers and sellers of securities but does not set rules governing the conduct of subscribers other than by exclusion from trading. Any ATS must be a registered broker-dealer, file Form ATS, and submit to the SEC and FINRA detailed information regarding the types of subscribers it expects to admit, the securities it expects to trade, the manner in which the system operates and the relevant infrastructure and procedures for operation of the ATS. An ATS is subject to extensive reporting requirements and increased oversight in relation to other broker-dealers.
 

Additional comments regarding the legal situation for trading, social trading or signalling platforms or what FinTech’s must be aware of in this business area

The SEC has proposed expansions to the definition of securities exchange that might result in additional FinTechs being required to either register as a securities exchange or, more likely, become an ATS that is exempt from such registration.

In addition to certain changes to regulations that have already been proposed, the SEC itself has been signalling that it intends to introduce new regulations and restrictions regarding social trading, signalling platforms and other trading platforms that promote “gamification” of the trading of securities. 

Social trading and trade signalling are also popular on crypto currency platforms that are not presently regulated by the SEC. The CFTC does not have statutory authority to regulate these exchanges, and the SEC has publicly stated that it believes these exchanges should be SEC-regulated. 

Further, if the trading platform is engaged in the business of money transmission, they would need to comply with the BSA, which requires money transmitters to collect and retain information about their customers and share pertinent information with the FinCEN. The trading platform will also need to comply with certain state laws regarding money transmission licenses and consumer protection.

Economic conditions

Market size for trading, social trading or signalling platforms and biggest companies in this business area

Reliable information regarding online trading on brokerage platforms (versus traditional trading) is not available. That said, online trading platforms are broadly accepted, with FinTech-only firms like Robinhood gaining significant market share. The r/wallstreetbets Subreddit has become a very popular avenue of sharing social trading advice with over 12 million members, largely fuelling massive spikes and crashes in the prices of some “meme stocks” such as GameStop and AMC Networks. 

Additional comments regarding the economic situation for trading, social trading or signalling platforms or what FinTech’s must be aware of in this business area

This is an area where there will likely be significant additional regulation that has yet to be proposed. 
 

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