Over the last decade, we saw the introduction of new investment management systems, such as PAMM, MAM, and Social Trading. What started as rather similar systems purely based on copying trades between a handful of accounts has evolved into sophisticated solutions that empower brokers to build their business around such services.
The rising interest of traders, brokers, and regulators in such systems has stimulated the emergence of various contradirectional trends that affect the development of money management platforms. In this article, we will analyze these trends in detail and answer one lingering question, “What may happen in the future to money management systems?”
We have divided described trends into two general groups. The first group unites processes that cause the acceleration and democratization of the market, while the second, in contrast, leads to market organization and regulation.
Democratization of trading
Simplification
Simplification is a process of optimizing the key functionality of solutions and reducing the number of extra features. Two general groups of traders interested in it. Group A comprises newcomer investors who want the simplicity of a trading platform to facilitate learning about trading fundamentals. Group B are seasoned traders that use “lite” solutions’ interfaces to make basic transaction operations (like “open” and “close”) from mobile devices without additional efforts. Despite having similar desires, the goals of these two groups are different.
Gamification
Gamification’s main purpose is to make investing more affordable and interactive for clients. Since beginners are only exploring the trading industry, they get attracted by democratization trends that allow trading with micro lots via synthetic symbols. In contrast, skilled traders are looking for features that can highlight their advantages, including experience and profitability. One of the ways to attract them is to organize trading contests or introduce special badges that highlight their achievements on the leaderboard.
Rise of communities
Gamification has increased specialized forms of communication between traders and, as a result, has led to the emergence of specialized communities. Such communities are also a place for exchanging experiences, useful information, and best practices with peers as well as a space for competing and socializing. The most popular forms of such communities are chats and groups in social networks, including, Telegram and Facebook.
Read more via “How does democratization of trading affect popular investment platforms?“
Market regulating trends
Regulatory recommendations
With the aim to stabilize uncertain situations caused by previously described trends, regulators and brokers have introduced additional measures and legislation. A bright example of this process is the strengthening of KYC requirements, which was originally suggested by regulators to raise the average proficiency level of money managers and make the trading process safer. Brokerages accepted this action and found it especially helpful to identify users with limited experience and later educate them to mitigate potential risks.
Definition of traders categories
Besides KYC, there is also the widespread practice of investor classification. Striving to stabilize the trading activity, regulators have already proposed specific types of investors or funds (including AIFs). Brokers may complement these laws with their own requirements for money managers or signal providers — users who are closer to professional and institutional traders than to retail investors.
Read more via “Regulations of Investment Platforms and Democratization of Trading.“
Consequences
Even though all described processes directly affect the future of investment platforms in one way or another, there is one common point hidden behind them — the lack of differentiation of investment offers between brokers. PAMM and Social Trading systems provided by brokerages are very similar to each other: they are advertised as an alternative way for trading or as a solution for investors with limited experience.
This strategy obstructs brokers from promoting their investment services and standing out from the competition. To solve this issue, brokers should not just prepare themselves to face the consequences of market complications and legislation, but also aim to create original offers. By focusing on one of the trends, brokers may achieve differentiation; for instance, brokers can choose whether they should focus their business around gamification to engage users, simplification elements to attract a new generation of investors, or provide advanced functionality to create a more sophisticated environment for conservative traders.
