When will there be an end to copytrading?
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Copytrading is automatically copying the positions of a selected trader. In recent years, copytrading has become a real fashion phenomenon. It originated on the Zulutrade website. All the copytrading brokers were initially associated with this site, then gradually the brokers launched their own copytrading platform. This is the case, for example, of the broker eToro with its openbook, which is the leader today.
The targets, of course, are novice traders. The argument is simple: Come and copy the best traders rather than lose your money with manual trading. But in reality, almost all those who register end up losing all their capital. The problem with copytrading is not the principle itself, it is the fact that there is currently no regulation by the regulatory authorities. Client protection is non-existent. Yet the risks taken by individuals are considerable.
It is easy to understand people’s attraction to copytrading:
- Profit motive: All copytrading platforms put forward traders with performances to make Madoff himself pale. It is certain, the performances posted by some create dreams.
- Easy to use: With a simple click, you can copy the traders of your choice. No need to go through a management mandate as is the case with a classic account manager. You can stop copytrading at any time.
- Accessibility: Whatever the size of your account, you can access the copytrading service. Smaller wallets are not excluded from the system, there is no minimum entrance fee.
- A wide choice: On the platforms, there are thousands of signal providers. Theoretically, therefore, there are very varied profiles. Traders can thus choose the level of risk that suits them.
On all copytrading platforms, signal providers are paid based on transaction volume. The broker onlends a portion of the commissions he receives (the spread). The more a supplier has followers, the more his transaction volume increases. Effectively, the positions he opens are replicated on the accounts of his followers. If a supplier wants to make a lot of money, all he has to do is maximize the number of his transactions.
Of course, if he wants to have a lot of followers, he must have enticing performance figures. A trader who makes 10% a year by managing his risk perfectly does not interest novice traders. They are looking for traders who usually make at least 10% a month. Users of copytrading platforms come with the aim of doubling their capital in a minimum of time. The problem is that they are not aware of the risk. To reach performance of several tens or hundreds of % per year, it is necessary to take enormous risks and one day or another it always ends in the total loss of capital.
Of course, copytrading platforms display risk indicators (openbook etoro) or portfolio drawdown (Zulutrade) but private individuals do not pay attention to these. In addition, platforms emphasize performance to attract customers and risk appears as a secondary element. It is precisely with risk management that a trader’s quality is judged. Between trader 1 who makes 15% per year with a drawdown of 3% and trader 2 who makes 200% per year with a drawdown of 80%, almost all those registered on the platforms will choose trader 2. Yet Trader 1 is far superior in terms of performance/risk.
Signal providers understand this. To capture followers, they will therefore favour performance over risk. You should be aware that among these suppliers, the majority are using a demo account. When there are losses, only the followers lose their money. It's easy to take risks when it's not about your money.
For those who are on real accounts, they often have only a few months of performance history (if you open an account with a professional, it is wise to ask him for several years of history before you trust him). Moreover, to be posted on a live account, the trader only has to deposit the minimum amount with the broker, the size of the account is never posted, only the performance is.
For the broker, copytrading is also very profitable because it multiplies his clients’ trading volumes. On a copytrading platform, a private individual places a lot more orders than if he were trading alone. Moreover, faced with the lure of profit, individuals also resort massively to leverage, thinking they can't lose their money with the best traders on the platform.
As if this were not enough, brokers offering copytrading platforms have some of the highest trading commissions (especially spread) on the market. In their defence, they indicate that they provide an additional service to their clients. But in reality, it's just a way to take even more money from their customers.
The only sucker in the story is you! A naïve person who believes that it is possible to make several hundreds of % without risk and who is ready to pay a lot for a service which, in the end, will make him lose all his capital.
At present, platforms offering copytrading are authorised by the AMF. Copytrading is therefore completely legal for the simple reason that it is not listed as investment advice. It is a simple investment tool, like, for example, analysis.
Yet I see a huge difference between analysis and copytrading. Copytrading gives a third party permission to place orders on your account. In finance, this is simply called portfolio management and requires a management mandate (between the manager and the client). But for the AMF, it's different.
I don’t understand the AMF's position on this. It can be ouverbearing with fund managers (and impose a multitude of rules) but with copytrading, it leaves the client without any protection. Worse, the fact that the AMF authorises this practice is even a selling point for copytrading platforms. If you go to the Zulutrade site, on the homepage there is an indication that the service is regulated by the EU.
Obviously, brokers offering this type of service are not directly regulated in France. They are regulated in Cyprus and use a European passport (see. MiFID regulation: a pledge of confidence?). We can therefore assume that the AMF cannot do anything from a regulatory point of view because of MiFID regulation. However, a regulated broker in Cyprus who offers direct account management services (with a real manager) is subject to certain rules. The most restrictive is the ban on advertising in France. This requires direct regulation by the AMF. Brokers offering copytrading are free to advertise.
With the arrival of MiFID 2 in January 2017 (see. What will MiFID 2 change for Forex brokers?), one might have thought that the AMF and the regulatory authorities would have seized the opportunity to change things. Well, it didn’t. MiFID 2 gave the AMF the right to remove certain advertisements for brokers (the most unscrupulous of the kind, with €100, trading with €40,000), but not advertisements for copytrading (which, however, put forward ultra-risky traders who make 500% per year).
For the time being, the AMF has not taken any measures to combat the development of copytrading. Platforms are free to do what they want. The AMF supposedly made client protection its battle horse, but it is doing nothing to protect the increasingly numerous victims of copytrading.
It protects individuals against professional account managers but does not protect them from novice managers found on copytrading platforms.
In the years to come, there is no doubt that the AMF will one day list copytrading as investment advice. That day, it will simply be the end of copytrading as we know it and we will move towards a more professional service. Brokers like Etoro will have to choose between remaining a broker and becoming an investment advisor. Indeed, by combining the 2 activities, there is a strong conflict of interest since the broker is remunerated on the transaction volume.
It remains to be seen when the AMF will decide. Probably when the number of complaints received against copytrading becomes too high. Until then, that leaves time for many individuals to lose their money.
The targets, of course, are novice traders. The argument is simple: Come and copy the best traders rather than lose your money with manual trading. But in reality, almost all those who register end up losing all their capital. The problem with copytrading is not the principle itself, it is the fact that there is currently no regulation by the regulatory authorities. Client protection is non-existent. Yet the risks taken by individuals are considerable.
Copytrading arguments
It is easy to understand people’s attraction to copytrading:
- Profit motive: All copytrading platforms put forward traders with performances to make Madoff himself pale. It is certain, the performances posted by some create dreams.
- Easy to use: With a simple click, you can copy the traders of your choice. No need to go through a management mandate as is the case with a classic account manager. You can stop copytrading at any time.
- Accessibility: Whatever the size of your account, you can access the copytrading service. Smaller wallets are not excluded from the system, there is no minimum entrance fee.
- A wide choice: On the platforms, there are thousands of signal providers. Theoretically, therefore, there are very varied profiles. Traders can thus choose the level of risk that suits them.
The only winners of copytrading are signal providers and brokers
On all copytrading platforms, signal providers are paid based on transaction volume. The broker onlends a portion of the commissions he receives (the spread). The more a supplier has followers, the more his transaction volume increases. Effectively, the positions he opens are replicated on the accounts of his followers. If a supplier wants to make a lot of money, all he has to do is maximize the number of his transactions.
Of course, if he wants to have a lot of followers, he must have enticing performance figures. A trader who makes 10% a year by managing his risk perfectly does not interest novice traders. They are looking for traders who usually make at least 10% a month. Users of copytrading platforms come with the aim of doubling their capital in a minimum of time. The problem is that they are not aware of the risk. To reach performance of several tens or hundreds of % per year, it is necessary to take enormous risks and one day or another it always ends in the total loss of capital.
Of course, copytrading platforms display risk indicators (openbook etoro) or portfolio drawdown (Zulutrade) but private individuals do not pay attention to these. In addition, platforms emphasize performance to attract customers and risk appears as a secondary element. It is precisely with risk management that a trader’s quality is judged. Between trader 1 who makes 15% per year with a drawdown of 3% and trader 2 who makes 200% per year with a drawdown of 80%, almost all those registered on the platforms will choose trader 2. Yet Trader 1 is far superior in terms of performance/risk.
Signal providers understand this. To capture followers, they will therefore favour performance over risk. You should be aware that among these suppliers, the majority are using a demo account. When there are losses, only the followers lose their money. It's easy to take risks when it's not about your money.
For those who are on real accounts, they often have only a few months of performance history (if you open an account with a professional, it is wise to ask him for several years of history before you trust him). Moreover, to be posted on a live account, the trader only has to deposit the minimum amount with the broker, the size of the account is never posted, only the performance is.
For the broker, copytrading is also very profitable because it multiplies his clients’ trading volumes. On a copytrading platform, a private individual places a lot more orders than if he were trading alone. Moreover, faced with the lure of profit, individuals also resort massively to leverage, thinking they can't lose their money with the best traders on the platform.
As if this were not enough, brokers offering copytrading platforms have some of the highest trading commissions (especially spread) on the market. In their defence, they indicate that they provide an additional service to their clients. But in reality, it's just a way to take even more money from their customers.
The only sucker in the story is you! A naïve person who believes that it is possible to make several hundreds of % without risk and who is ready to pay a lot for a service which, in the end, will make him lose all his capital.
The paradox of AMF and copytrading
At present, platforms offering copytrading are authorised by the AMF. Copytrading is therefore completely legal for the simple reason that it is not listed as investment advice. It is a simple investment tool, like, for example, analysis.
Yet I see a huge difference between analysis and copytrading. Copytrading gives a third party permission to place orders on your account. In finance, this is simply called portfolio management and requires a management mandate (between the manager and the client). But for the AMF, it's different.
I don’t understand the AMF's position on this. It can be ouverbearing with fund managers (and impose a multitude of rules) but with copytrading, it leaves the client without any protection. Worse, the fact that the AMF authorises this practice is even a selling point for copytrading platforms. If you go to the Zulutrade site, on the homepage there is an indication that the service is regulated by the EU.
Obviously, brokers offering this type of service are not directly regulated in France. They are regulated in Cyprus and use a European passport (see. MiFID regulation: a pledge of confidence?). We can therefore assume that the AMF cannot do anything from a regulatory point of view because of MiFID regulation. However, a regulated broker in Cyprus who offers direct account management services (with a real manager) is subject to certain rules. The most restrictive is the ban on advertising in France. This requires direct regulation by the AMF. Brokers offering copytrading are free to advertise.
With the arrival of MiFID 2 in January 2017 (see. What will MiFID 2 change for Forex brokers?), one might have thought that the AMF and the regulatory authorities would have seized the opportunity to change things. Well, it didn’t. MiFID 2 gave the AMF the right to remove certain advertisements for brokers (the most unscrupulous of the kind, with €100, trading with €40,000), but not advertisements for copytrading (which, however, put forward ultra-risky traders who make 500% per year).
For the time being, the AMF has not taken any measures to combat the development of copytrading. Platforms are free to do what they want. The AMF supposedly made client protection its battle horse, but it is doing nothing to protect the increasingly numerous victims of copytrading.
It protects individuals against professional account managers but does not protect them from novice managers found on copytrading platforms.
In the years to come, there is no doubt that the AMF will one day list copytrading as investment advice. That day, it will simply be the end of copytrading as we know it and we will move towards a more professional service. Brokers like Etoro will have to choose between remaining a broker and becoming an investment advisor. Indeed, by combining the 2 activities, there is a strong conflict of interest since the broker is remunerated on the transaction volume.
It remains to be seen when the AMF will decide. Probably when the number of complaints received against copytrading becomes too high. Until then, that leaves time for many individuals to lose their money.
