Is social trading the next big thing or just another marketing channel for the retail derivatives industry and how is social media marketing going to develop in this sector? We believe that the impact of social trading could be significant however the role of regulation may be decisive. T

1. Mirror Trading and Social Media Marketing –
Regulatory and Business Risks
Reed Smith and Black Swan Partners
February 2013
Robert Falkner
Reed Smith
rfalkner@reedsmith.com
Dominic Crosthwaite
Black Swan Partners
dominic@blackswanpartners.co.uk

2. r e e d s m i t h . c o m February 2013 i
Table of Contents Page
Social Media Marketing and Social Trading.....................................................................1
Mirror Trading: Social Media Marketing Regulatory Issues .............................................7
Consequences of Contravention..................................................................................7
UK Regulation. .............................................................................................................7
Regulatory Risks..........................................................................................................9
Mirror Trading: Regulatory Issues..................................................................................15
Consequences of Contravention................................................................................15
The UK Regulations. ..................................................................................................15
FSA Jurisdiction. ........................................................................................................16
Regulatory Risks........................................................................................................17
Appendices ....................................................................................................................18
Reed Smith.....................................................................................................................18
Black Swan Partners......................................................................................................19
FOUNDED 1877
MORE THAN 1,700 LAWYERS
RANKED AMONG THE TOP FIRMS
FOR NINE STRAIGHT YEARS FOR
CLIENT SERVICE BY THE BTI
CONSULTING GROUP
OFFICE LOCATIONS:
NEW YORK
LONDON
HONG KONG
CHICAGO
WASHINGTON, D.C.
BEIJING
PARIS
LOS ANGELES
SAN FRANCISCO
PHILADELPHIA
SHANGHAI
PITTSBURGH
HOUSTON
SINGAPORE
MUNICH
ABU DHABI
PRINCETON
N. VIRGINIA
WILMINGTON
SILICON VALLEY
DUBAI
CENTURY CITY
RICHMOND
GREECE
KAZAKHSTAN

3. r e e d s m i t h . c o m February 2013
Social Media Marketing and Social Trading
Is social trading the next big thing or just another marketing channel for the retail
derivatives industry and how is social media marketing going to develop in this sector?
We believe that the impact of social trading could be significant however the role of
regulation may be decisive. The business model of less sophisticated investors
following leaders on social media networks has inherent risks. The current regulatory
regimes in the UK and elsewhere do not clearly address this model but if it enjoys
success it is certain that the regulators will catch-up. The industry should be sensitive to
balancing the risk of rigorous compliance halting business growth against the longer
term risk of a light touch compliance attitude leading to adverse regulatory intervention
with the same outcome. This paper gives a summary of the business model concept
and the social media challenges and identifies some of the regulatory issues which
need to be considered.
Rob Falkner Dominic Crosthwaite
Reed Smith Black Swan Partners
February 2013

4. r e e d s m i t h . c o m February 2013
SEE MARKETS DIFFERENTLY
JANUARY 2013
SOCIAL MEDIA MARKETING: OVERVIEW
SOCIAL MEDIA CATEGORIES
• Micro blogging
• Crowd sourced content
• Social networks
• Picture sharing
• Video sharing
• Business networks
• Reviews & Rating
• Social bookmarks
The Conversation Prism: By Brian Solis & JESS3

5. r e e d s m i t h . c o m February 2013
BASIC FACTS: MAIN PLAYERS
Founded Registered Users Registered UK Users Total Active Users
LinkedIn 2003 200,000,000 10,000,000 160,000,000
Facebook 2004 1,000,000,000 33,000,000 1,000,000,000
Twitter 2006 500,000,000 10,000,000 200,000,000
Tumblr 2007 168,000,000 8,400,000 120,000,000
Pinterest 2010 25,000,000 500,000 10,000,000
eToro 2007 2,000,000
Note: Where not published, UK figures based on BSP Estimates
Facebook ‘Likes’ (Endorsements by users - Jan 2013)
BASIC FACTS: EXAMPLE METRIC
-
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000

6. r e e d s m i t h . c o m February 2013
Be the conversation AND comply with financial regulations
Take advantage of recommendations made by friends that are
not classified as financial promotions
CHALLENGES FOR CFD/FX COMPANIES
CHALLENGES FOR CFD/FX COMPANIES
‘Compete’ or ‘partner’ with the companies designed to disrupt

7. r e e d s m i t h . c o m February 2013
CHALLENGES FOR CFD/FX COMPANIES
Respond to the changing world of search
• 2009: 25% of shoppers started research for an online
purchase on a search engine like Google and 18% started on
Amazon*
• 2012: 13% of shoppers started research or an online purchase
on a search engine like Google and 30% started on Amazon*
Your company needs to be in the search owners environment
* Forrester Research
CHALLENGES FOR CFD/FX COMPANIES
Find the categories that work for you, the tools within it and be
part of the conversation
Your
Business
Multiple
Conversations
The Tools

8. r e e d s m i t h . c o m February 2013
REGULATION AND SOCIAL MEDIA
Each category has a conversation
Each conversation has its own tool
Each tool has its own regulatory approach
The Conversation Prism: By Brian Solis & JESS3

9. r e e d s m i t h . c o m February 2013
Mirror Trading: Social Media Marketing
Regulatory Issues
The rapid growth of marketing through social media sites generates significant
opportunities for the retail derivatives market.
But do we understand what this means in terms of legal ramifications. Features of
social media with broadcast and followings, interactive collaboration and search
through social media site links in the highly regulated financial services sector raise
immediate regulatory compliance issues.
Consequences of Contravention. Contravention of the UK FSMA financial
promotion restriction is a criminal offence. From a commercial perspective, an
investment transaction is unenforceable against a person who enters into it as a
consequence of an unlawful communication. There is provision for firms to appeal to
the courts’ just and equitable discretion to enforce contracts but this is not something
that could be relied upon in the normal course.
UK Regulation. Marketing communications which constitute “financial promotions” in
the UK are unlawful unless they are made or approved by an FSA authorised/regulated
firm or an exemption applies.
A marketing communication is a financial promotion where the communication is made
in the course of business.
This means that the communicator must have a commercial interest in the matter, as
opposed, for example, to recommendations made by friends in a social group to each

10. r e e d s m i t h . c o m February 2013
other for no financial gain. Someone who sends trading signals in return for fees or a
commission will have a commercial interest.
To be a financial promotion a marketing communication must also be an invitation or
inducement to engage in investment activity.
Information or image only communications do not constitute invitations or inducements;
there must be an added element that seeks to persuade the recipient to enter into an
investment transaction.
Search links, banners and logos on their own will not constitute invitations or
inducements. There is only a financial promotion where there is accompanying content
which seeks to persuade investors to take steps to execute investment transactions.
Simple statements such as 'these are links to brokers' or 'click here to find out about
markets” or “we provide links to all the big exchanges' will not amount to inducements
to invest.
Where a data supplier or trader merely presents transaction execution prices of
investments, whether historic or real time, this purely factual information will not be an
inducement. Nor will adding contact details to such prices make them invitations or
inducements to engage in investment activity. However, any additional wording seeking
to persuade persons to connect to brokers so that they may buy or sell such
investments at or following the real time prices displayed will amount to an invitation or
inducement and therefore will be a financial promotion.
Performance tables showing the past performance of investment managers or traders
on social media networks determined by the application of pre-set criteria will not, in
themselves, be inducements. But if the tables are accompanied by, or presented or
provided in a way that they are, an actual or implied recommendation that a particular
manager or trader’s performance should be followed by entering into like transactions,
they will become inducements and therefore financial promotions.
There are only very limited exemptions for electronic communications in this context.
Generic promotions which neither identify a particular investment (only a general
class of investment products – e.g. FX as an asset class) nor identify a person that
conducts investment business. The exemption will not apply if it refers to any person
who may arrange, recommend or execute transactions.
Mere conduits, typically news sites, that communicate the financial promotions of other
persons are exempt. The exemption does not apply to the person who causes the mere

11. r e e d s m i t h . c o m February 2013
conduit to make the communication. It only applies to the mere conduit if (a) it exercises
no control over the content of the communication: and (b) the principal purpose of the
mere conduit is to receive and transmit other person’s communications.
Regulatory Risks. The principal regulatory risks than can be identified in relation to
social media marketing are first unregulated social network platforms carrying
marketing communications which are not approved by an FSA authorised firm or
exempt. The marketing communications of any social network platform wherever
located in the world will be subject to FSA regulation to the extent those
communications have an effect in the UK – that is- if they are acted on by UK clients. If
there is a contravention of the financial promotion restriction resultant investment
transactions may be unenforceable.
Second, where social media sites promote social interaction there is a risk that
broadcasts or chat messages from top trader or leaders (who receive fees or
commission for trades made by followers) are sent to encourage followers and so may
be characterised as financial promotions but which are not approved by an FSA firm
and therefore unlawful.
Third, there is a risk that marketing communications from or approved by regulated
firms (social network platforms or execution brokers) are considered not to be COBS
compliant, or not - “fair clear and not misleading”. For example information about top
trader performance may be misleading because performance on open positions is not
included. Adequate risk warnings are another area where there may not be COBS
compliance. Are risks about a leader taking larger risks after enjoying initial success
and then making significant losses which wipe out followers adequately disclosed? Is
there enough information about the make-up of past performance sufficient for followers
to understand the risks and that there are no guarantees that past behavior and
performance will be indicative of future results?

12. r e e d s m i t h . c o m February 2013
SEE MARKETS DIFFERENTLY
JANUARY 2013
SOCIAL TRADING: OVERVIEW
WHAT IS SOCIAL TRADING?
Constituent Parts:
• Clients (social)
• Technology (network)
• Trades (signals)
• Broker (execution)
The final element is:
• ‘humanisation’

13. r e e d s m i t h . c o m February 2013
THE PROVIDERS
Algo
Signals
Networks
Network & Broker
HISTORY OF THE MARKET
‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13
2005 Metaquotes launches including EAs
Tradency launches
2007 ZuluTrade launches
2008 Currensee and eToro launch
2009 Ayondo launches
2010 eToro launches Open Book
2011 eToro release Copy Trader
2012 FX Junction and ZuluTrade launch copy trader
Oanda launch FX Unity, Tradeo goes live
Metaquotes launches signal copy trader
2013 Alpari goes live with FX Junction
Markets.com launches social trading with Sirix

14. r e e d s m i t h . c o m February 2013
SIZE OF THE MARKET
• The global CFD and FX
market is estimated to be
close to USD$8 billion
revenue per year
• Social trading, excluding
MT4 EAs estimated at $40m
per year
• Accounts for close to 0.5%
of annual revenue
Note: Excludes revenue generated within existing brokerages
AN INTERNATIONAL MARKET
A different regional distribution of clients
Social
Trading
CFD
Provider
FX
Provider

15. r e e d s m i t h . c o m February 2013
MARKET TRENDS
• Existing CFD/FX providers launching social trading white label
partnerships
• Regulatory solutions to social trading / investment networks
• Continued humanisation of trading solutions
• Increased price transparency and sensitivity from followers
• The empowerment of the network
WHY DOES IT FEEL DIFFERENT?
vs.

16. r e e d s m i t h . c o m February 2013
A CUSTOMER EXPERIENCE
1. Open an eToro account.
(You can login using a Facebook a/c)
2. Deposit with debit card
3. Never see a trading screen
4. Pick up to 5 people
5. A maximum of 20 clicks
6. Check it every few weeks/months
Up 20% and down 9% and still paying 3pips on EUR/USD
20 clicks = 1,500 trades
SEE MARKETS DIFFERENTLY

17. r e e d s m i t h . c o m February 2013
Mirror Trading: Regulatory Issues
The model of unsophisticated investors following leaders has inherent risks. The
current financial services regulations in the UK do not clearly address this business
model or risk but as it grows it is certain the regulators will pay more attention.
Consequences of Contravention. Compliance with the regulations matters
because if it is determined that a firm is undertaking a regulated activity and is not
authorized and regulated by the FSA it is a criminal offence. From the commercial
perspective, the matter of most significant importance for execution brokers is that an
agreement made by a person undertaking a regulated activity without FSA
authorisation is unenforceable against the investor (subject to the just and equitable
jurisdiction of the court) and the investor is entitled to be put back into their original
position. Further an investment transaction is unenforceable against a person who
enters into the transaction as a consequence of something said or done by any person
in the chain leading up to the transaction undertaking regulated activity without FSA
authorisation.
On the other hand where a firm is FSA authorised but does not have the correct FSA
permissions, for example the person is authorised for the activity of arranging but is
found to also be undertaking the activity of managing or advising, then that of itself
does not render the investment transaction unenforceable – although there may
however be an associated breach of FSA COBS rules which provides the investor with
a basis for a claim and could lead to FSA (from 1 April 2013 FCA) disciplinary action.
The UK Regulations. The most relevant regulated activities in connection with
mirror trading are (a) arranging (bringing about) deals in investments or making
arrangements with a view to transactions in investments; (b) advising on investments;
and (c) managing investments.
With respect to “arranging (bringing about) (or arrangements with a view to) deals in
investments” arrangements must be such that they bring about, or would bring about
the relevant transaction. A person arranges if his involvement in the chain of events
leading to the transaction is of sufficient importance that, without such involvement, the
transaction would not take place.
Social network platforms that make technical analysis available, facilitate the selection
of trading strategy applications or top traders and facilitate connection to transaction
execution services are carrying on the regulated activity of arranging.

18. r e e d s m i t h . c o m February 2013
With respect to “advising on investments” this activity is the activity of giving “advice on
the merits of…buying [or] selling…an investment,” . Giving a person generic advice
about investments (for example, invest in FX rather than gold) is not a regulated activity
nor is giving information as opposed to advice
Recommendations or guidance about trading strategy applications or trading algorithms
does not actually constitute advice on an investment’s merits but whether trading
signals constitute trade recommendations and therefore advice has to be considered.
On one view the publication of trade execution information (a trading signal) which an
investor may elect to follow or not is simply the publication of information and not a
recommendation on merits. But this view may not prevail where there is chat between
investors and top traders on social network sites about the trader’s strategy etc. Social
network platforms will have to consider whether they may be held responsible for this
activity or the individual top trader will be or both?
With respect to “managing investments” a person must exercise discretion. Further the
discretion must also be exercised in relation to the composition of the investments
under management and not in relation to some other function. Trading signals of a top
trader is just the communication of real time transaction execution data but could
automatic following without a last look function constitute managing investments?
On one view, a social network platform only acts as a conduit hosting software
applications and processing real time execution data that is received. But where the
investor relies on a top trader acting as an agent for a social network platform to select
transactions which will in practice be automatically executed in the investor’s account it
may be that this activity will constitute managing investments by either or both of the
social network platform or the top trader.
FSA Jurisdiction. The online mirror trading market is international such that which
country’s regulations may apply has to be considered.
Generally the characteristic place of performance determines where a regulated activity
is undertaken. Countries interpret this concept differently. In the UK arranging and
managing investments is usually taken to be carried out where the arranger or manager
is located. Advice is usually treated as being provided where the recipient is located. If
the service provider and its host servers are located outside the UK then it can
reasonably contend that although it may be undertaking the activities of arranging or
managing investments it is not doing so within the jurisdiction of the FSA. In addition
the Overseas Persons exemption may apply where the firm does not maintain a

19. r e e d s m i t h . c o m February 2013
permanent place of business in the UK. An overseas person does not carry on the
regulated activities of arranging if the relevant investment transaction is entered into by
the client with an FSA authorized firm.
In addition those firms that are regulated in other EEA countries, such as Cyprus, will
probably have obtained MiFID passport rights to carry on regulated activities in the UK.
Regulatory Risks. As with social media marketing the first risk that can be identified
is that of unregulated social network platforms operating in the UK being characterised
as “arranging” transactions with the consequence that resultant transactions are
unenforceable.
In addition top traders making broadcasts or sending chat messages may render their
signaling activity a regulated activity of arranging, managing or advice with the
consequence that resultant transactions entered into by followers or copiers may be
unenforceable.
Secondly, those social network platforms that are regulated may fail to adequately
assess appropriateness in relation to their users who blindly follow others. Do the users
have the necessary experience and knowledge to understand the risks involved in
selection of trading strategy applications and top traders?
There is also an issue of churning. Where either trade signals are characterised as
trade recommendations or where automated trade execution on following top trader
signals are characterised as managing investments – in either case- there is a risk that
the top trader may over trade to generate fees from followers rather than to achieve
trade performance.
Lastly there is the rogue trader risk. What is the exposure of service providers where a
top trader suddenly assumes spectacular risks with the result that all followers monies
are lost or seeks to manipulate the market – what control do firms exercise over top
traders, leaders, gurus etc. with respect to sticking with past strategies or with respect
to broadcasts or interactive chats by top traders with followers? It is also noted that
regulated execution brokers in the EEA are generally expected to monitor client orders,
including those generated by trading algorithms, and ensure compliance with
exchange/trading platform rules and market abuse rules.

20. February 2013
Appendices
Reed Smith
Reed Smith is a global relationship firm with more than 1,700 lawyers located in 25 offices throughout the United
States, Europe, Asia and the Middle East. Founded in 1877, we represent leading international businesses, from
Fortune 100 corporations to mid-market and emerging enterprises, and have been ranked 2nd as “International Law
Firm of the Year” two years in a row at The Lawyer Awards.
Reed Smith has more than 300 practitioners based in London. We pride ourselves on big firm expertise coupled with
a long-standing commitment to quality, teamwork and professionalism. We represent large listed companies as well
as mid-market and emerging companies and successfully represent our clients in a broad spectrum of legal concerns.
Two-thirds of our work has a cross-border dimension and firmwide clients include financial institutions, media, energy
and pharmaceutical companies, manufacturers, technology companies and innovators, healthcare providers and
insurers, communications companies, universities, real estate developers, and government bodies. We have a very
strong reputation for client service, a notable string to our bow for which we regularly receive public endorsements,
including our recent ranking in Legal Week’s Client Satisfaction Report as one of the best legal advisers for the third
year running.
Robert Falkner
Partner
rfalkner@reedsmith.com
London
T: +44 (0)20 3116 2980
F: +44 (0)20 3116 3999
Education
University of Cambridge,
Sidney Sussex College, 1985,
LL.M.
University of Cambridge,
Sidney Sussex College, 1984,
Evan Lewis Thomas
Scholarship
Victoria University, New
Zealand, 1984, LL.M.
Victoria University, New
Zealand, 1981, LLB, Hons
Overview
Robert's practice covers domestic and international financial services. He
specialises in litigation, regulatory enforcement defence work, general
regulatory and compliance advice in the securities, derivatives, commodity and
foreign exchange markets.
Robert joined the London office of Reed Smith as a partner in 2009. Prior to
that he was a partner in the London office of a US firm for five years and
before that he was General Counsel for, and a director of, Cantor Fitzgerald

21. February 2013
Black Swan Partners
Black Swan Partners www.blackswanpartners.co.uk is a specialist retail derivatives and FX consultancy. Founded in
2008, we offer consultancy and data analysis services to exchanges, banks, brokers and gaming clients. The directors
of Black Swan Partners have more than 40 years of collective sector experience and a unique range of expertise in
business planning and development, product strategy, research, data analysis, regulation and technology.
Our consulting offering is centered on three core service offerings:
 Business - establish new CFD/FX projects or divisions within existing businesses and address market trends.
 Technology - specify technology requirements, determine implications and implement new projects.
 Regulation - understand the business implications of regulation and implement compliant solutions.
Black Swan Partners is results driven and has produced clear deliverables and innovative solutions for a broad range
of clients, including some of the leading financial services companies in the market.
Victoria University of
Wellington, New Zealand,
1978, Sweet & Maxwell Prize
in the law of Contract
Professional Admissions /
Qualifications
New Zealand
England and Wales
International (broker-dealer) and eSpeed International (electronic markets) and
their European and Asian affiliates for nine years. He was responsible for
legal, compliance, tax, company secretarial and risk matters arising in Europe
and Asia. Before joining the Cantor Fitzgerald group, Robert was a partner in
both the Litigation Department and the Antitrust Department of a leading UK
law firm where he acted in numerous securities, banking, insurance and
antitrust litigation matters, including the Bank of England Board of Banking
Supervision Barings Inquiry and for the SIB (the FSA predecessor) in various
regulatory enforcement proceedings. Robert dealt with antitrust actions before
the High Court and European Commission.
Employment History
 2009 - Reed Smith
 2004 - Morgan Lewis & Bockius - Partner
 1995 - Cantor Fitzgerald International - General Counsel EMEA
 1990 - Norton Rose - Partner
 1985 - Norton Rose

22. February 2013
Dominic Crosthwaite
Founder/Consultant
dominic@blackswanpartners.co.uk
London
T: +44 (0)20 3176 0090
W: www.blackswanpartners.co.uk
Overview
Since 2008, as a founder of Black Swan Partners a consultancy and data
analysis company Dominic has worked in the derivatives, FX, CFD and
exchange sector working on projects for clients that include LMAX, NYSE
Euronext, Eurex and Paddy Power Trader. His experience includes setting up
and running regulated and non-regulated start-up businesses.
Dominic was previously a Partner and Managing Director of Cantor Index,
owned by Cantor Fitzgerald LLP, running the spread betting, fixed odds and
sports exchange business.
He joined Cantor Index as a Business Analyst and was instrumental in the
development of Cantor FFO, the white label financial fixed odds platform
used by Ladbrokes, launched Cantor Spreadfair the first retail derivative
exchange and developed Cantor’s Spot FX product.
Before Cantor he worked at US based consultancy The Hackett Group
(answerthink). He is also an investor in Goddard Global, an issue advocacy
company, specialising in social media and coalition building. Dominic has
over 30 assigned patent applications and 12 granted patents in his name,
including the first real-time regulated online account opening system.
Employment History
 2008 – Black Swan Partners - Founder
 2006 – Cantor Index - Managing Director
 2001 – Cantor Index - Business Development
 1997 – The Hackett Group (answerthink)
 1996 – BSMG Worldwide, UK