Copy trading

Copy Trading enables individuals in the financial markets to automatically copy positions opened and managed by another selected individuals.

Unlike mirror trading, a method that allows traders to copy specific strategies, copy trading links a portion of the copying trader's funds to the account of the copied investor.[1] Any trading action made thenceforth by the copied investor, such as opening a position, assigning Stop Loss and Take Profit orders, or closing a position, are also executed in the copying trader's account according to the proportion between the copied investor's account and the copying trader's allotted copy trading funds.

The copying trader usually retains the ability to disconnect copied trades and manage them themselves. They can also close the copy relationship altogether. Copied investors are often compensated by flat monthly subscription fees on the part of a trader seeking to copy their trades.

Copy trading has led to the development of a new type of investment portfolio, which some industry insiders call "People-Based Portfolios" or "Signal Portfolios" (borrowing the terminology of the popular MetaQuotes Signal Marketplace).[2] People-based portfolios differ from traditional investment portfolios in that the investment funds are invested in other investors, rather than traditional market-based instruments.

History

Copy trading and mirror trading developed from automated trading, also known as algorithmic trading around 2005. It was an automated trading system where traders were sharing their own trading history that others could follow. Tradency was one of the first to propose an autotrading system in 2005, called by them Mirror Trader. A trader could host their own trading strategy on the systems with the trading records showing the performance of that strategy. Other users could then decide to mirror-copy on their account all the transactions generated from that strategy.[3]

This was soon followed in certain circumstances that allowed traders to connect their personal trading account directly in the platform, and from that moment each of their action was recorded and made available to the users without the need for submitting the trading strategy.

Since 2010, it has become an increasingly popular feature among online financial trading brokers as a way to enable less experienced traders to benefit from the trading decisions of investors whom they deem successful.

Study

In 2012 MIT funded a study directed by Dr. Yaniv Altshuler, showed that traders on the eToro social investment network who benefited from "guided copying", i.e. copying a suggested investor, fared 6-10% better than traders who were trading manually, and 4% better than traders who were copy trading random investors of their choice.[4]

As of 2013, Dr. Altshuler has been collaborating with Professor Alex "Sandy" Pentland of MIT on a study that aims to find a "sustainable" social trading mechanism in the aim of fine tuning traders' ability to benefit from copy trading.

Copy trading may however also have potentially adverse effects for investors. A recent experimental study argues that merely providing information on the success of others may lead to a significant increase in risk taking. This increase in risk taking may even be larger when subjects are provided with the option to directly copy others. From this perspective, copy trading may lead to excessive risk taking.[5]

Regulatory issues

In 2014, the United Kingdom Financial Conduct Authority (FCA) has raised concerns regarding copy trading as they deem the firms offer copy trading to be effectively unregulated investment managers. As such, the FCA has sent letters to those companies providing copy trading services notifying them of their intention to classify them as investment managers.[6][7]

Methods used

Different copy trading platforms employ different copy trading logic. These usually vary in regards to the minimum copy trading amounts, the minimum amount for a copied trade, and the way money in/out operations on behalf of the copied trader are reflected in the proportions between the copied-copying accounts.

Some platforms also enable traders to place Stop Loss orders on the entire copy trading relationship, allowing traders to control the risk of their copy trading activity based on the individual copied investors

Compared to social trading

Various financial trading operators offer copy trading capabilities as part of a larger social trading platform. Social trading usually includes the ability to connect with other investors using the platform in social ways (comments, likes, link sharing etc.) as well as find potential copy trading candidates by viewing investors' performance statistics.

Some platforms also provide ways to sort and rank traders according to certain performance parameters, thus making it easier for traders to find potential investors to copy. Typically, trading histories of available traders to copy are available along with detailed performance and risk metrics such as a site as http://www.copytrading.co.za

References
  1. Mirror trading in Investopedia
  2. "Follow Professional Traders to Profit with Live Forex Signals". freevestor. 2018-03-02. Retrieved 2018-04-20.
  3. Fillipo. "The Social Trading history". InvestinGoal. Retrieved December 11, 2017.
  4. MIT study 2012
  5. "Copy trading". Management Science. Jul 14, 2020.
  6. "Copy trading". UK Financial Conduct Authority. May 12, 2015.
  7. "UK's financial regulator warns on copy trading". Financial Times. March 11, 2014.
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