Trading platforms / social trading platforms / signal following
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 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.
Attitude of the country towards trading, social trading or signalling platforms
The acceptance of trading platforms, social trading platforms and signal following platforms is growing, although a high percentage of the people either still don’t know these services or don’t use it.
During the Covid-19 pandemic, several million Germans have become shareholders for the first time. Every sixth German was invested in the stock market in 2021. Many of them are using online broker trading platforms like Trade Republic, Scalable Capital or flatex to purchase and sell primarily stocks or ETFs.
The acceptance of trading platforms has increased significantly during the last two (2) years. Accordingly, the usage of social trading or signalling platforms has increased as well. However, among young people, the use of such FinTech platforms is higher than among the elderly population.
Obligations and requirements to provide trading, social trading or signalling platforms described above
In Germany, trading platforms, social trading platforms and signal following platforms are generally subject to an authorisation requirement as regulated in the German Securities Institutions Act (Wertpapierinstitutsgesetz – WpIG) and the German Banking Act (Kreditwesengesetz – KWG). In addition to WpIG and KWG, the EU-wide Regulation (EU) 2019/2033 on the prudential requirements of investment firms from 27 November 2019 (Investment Firms Regulation – IFR) as well as anti-money laundering and data protection regulations are to be complied with. The WpIG derives from the Directive (EU) 2019/2034 on the prudential supervision of investment firms from 27 November 2019 (Investment Firms Directive – IFD).
According to WpIG and KWG, a license is required to offer advisory services of the following kind: Portfolio Management, Investment Broking, and Contract Broking. Whether WpIG or KWG provisions apply depends on the scope of business. KWG applies in cases of more than EUR 30bn on their balance sheets on monthly average in the last 12 months and the conduction of issuing business, proprietary trading, or proprietary business. In all other cases, WpIG applies. Under certain circumstances, the platform's activities may also include the communication of financial analyses, which must be notified to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdiensleistungsaufsicht – BaFin).
License costs depend on the specific business model and result from fixed and time spent costs. Fixed costs are typically in the range between EUR 3,262.00 and EUR 10,114.00 and additional time spent costs depend on the complexity of respective business model.
Big investment firms are required to hold an initial capital of at least EUR 750,000.00, small and middle-sized Investment firms are required to hold an initial capital from EUR 75,000.00 to 150,000.00 depending on the business model. Additionally, investment firms must fulfill the own funds requirements.
A license is not required, where trading platforms, social trading platforms and signal following platforms are organised in a way that they don’t meet the requirements for investment or contract broking or portfolio management services.
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 regulation regarding investment firms was introduced in 2021, since it turned out, that the regulation concerning credit institutions would not fit these companies. However, big investment firms, which hold more than EUR 30bn in assets will still be supervised like credit institutions.
Market size for trading, social trading or signalling platforms and biggest companies in this business area
The social trading market forms the smallest market in the FinTech area, counting only 12 participants in 2019. In the social trading market segment, there were EUR 357m of assets under management in 2019. Wikifolio leads the market in this area. One (1) key concern is comparatively low risk-adjusted yields.
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
ETF savings plans among trading platform customers are becoming more widespread, so lower order commissions are cutting into the trading platforms profits. Trading platforms therefore need to expand to continue to increase their profits.